1. Value Creation

1.1. 5 Parts of Every Business

1.1.1. Существует пять составляющих любого бизнеса, каждая из которых перетекает в следующую: Создание ценности - Понимание, чего хотят люди или в чём нуждаются, и создание этого. Маретинг - Привлечение внимания и создание спроса на ваше творение. Продажи - Обращение потенциальных клиентов в платящих покупателей. Доставка ценности - Давать клиенту то, что ты обещал, и убеждаться, что они довольны. Финансы - Получать достаточно денег для продолжения своего делаи сделать ваши усилия стоящими. Take away any one of these five parts, and it’s not a business. When planning a new business or analyzing an existing venture, always begin with the five parts - they will help you discover any major issues or gaps quickly. The Personal MBA Explains the ‘5 Parts of Every Business’ Roughly defined, a business is a repeatable process that: Creates and delivers something of value... That other people want or need... At a price they’re willing to pay... In a way that satisfies the customer’s needs and expectations... So that the business brings in sufficient profit to make it worthwhile for the owners to continue operation. It doesn’t matter if you’re running a solo venture or a billion-dollar brand. Take any one of these five factors away, and you don’t have a business — you have something else. A venture that doesn’t create value for others is a hobby. A venture that doesn’t attract attention is a flop. A venture that doesn’t sell the value it creates is a non-profit. A venture that doesn’t deliver what it promises is a scam. A venture that doesn’t bring in enough money to keep operating will inevitably close. At the core, every business is fundamentally a collection of five Interdependent processes, each of which flows into the next: Value-Creation. Discovering what people need, want, or could be encouraged to want, then creating it. Marketing. Attracting attention and building demand for what you’ve created. Sales. Turning prospective customers into paying customers by completing a transaction. Value-Delivery. Giving your customers what you’ve promised and ensuring they’re satisfied with the transaction. Finance. Bringing in enough money to keep going and make your effort worthwhile. If these five things sound simple, it’s because they are. Business is not (and has never been) rocket science — it’s simply a process of identifying a problem and finding a way to solve it in a way that benefits both parties. Anyone who tries to make business sound more complicated than this is either trying to impress you with their worldliness or sell you something you don’t need. The 5 Parts of Every Business are the basis of every good business idea and business plan. If you can clearly define each of these five processes for any business, you’ll have a complete understanding of how it works. If you’re thinking about starting a new business, defining what these processes might look like is the best place to start. If you can’t describe or diagram your business idea in terms of these core processes, you don’t understand it well enough to make it work.

1.2. Economically Valuable Skills

1.2.1. Economically Valuable Skills are skills that are directly related to the 5 Parts of Every Business. Not every skill or area or knowledge is economically valuable. Some skills are primarily valuable for enjoyment or personal interest, but won’t help you improve your business. That’s okay: just don’t confuse them. Often, if you do what you love, the money won’t necessarily follow. To increase your value in the market, focus on improving skills that are economically valuable.

1.3. The Iron Law of the Market

1.3.1. Here’s the Iron Law of The Market: even the most ingenious idea will fail if no one wants it - creating something no one wants is a waste. Find ways to serve existing markets vs. building something, then finding a market to sell it to. This “iron law” is cold, hard, and unforgiving - ignore it, and you will fail.

1.4. Core Human Drives

1.4.1. There are five Core Human Drives that influence human behavior: Drive to Acquire: the desire to collect material and immaterial things, like a car, or influence. Drive to Bond: the desire to be loved and feel valued in our relationships with others. Drive to Learn: the desire to satisfy our curiosity. Drive to Defend: the desire to protect ourselves, our loved ones and our property. Drive to Feel: the desire for emotional experiences like pleasure or excitement. Whenever a group of people have an unmet drive, a market will form to satisfy it. The more drives your offer connects with, and the better you communicate those connections, the more attractive your offer will become.

1.5. Status Seeking

1.5.1. Humans are social creatures, and we care intensely about our relative status. Status Seeking is a universal phenomenon: when opportunities to increase social status appear, most people will seize them. In general, we like to be associated with people and organizations that we think are powerful, important, exclusive, or exhibit other high-status qualities or behaviors. Status considerations influence the vast majority of decisions and actions.

1.6. 10 Ways to Evaluate a Market

1.6.1. The 10 Ways to Evaluate a Market is a checklist that’s helpful in identifying the overall attractiveness of a new market: Urgency: How badly do people need this right now? Market Size: How many people would purchase this? Pricing Potential: What’s the highest price people would be willing to pay? Cost of Customer Acquisition: How easy is it to acquire a new customer? Cost of Value Delivery: How much does it cost to create and deliver the offer? Uniqueness of Offer: How unique is your offer versus the competition’s? How easy is it to be copied? Speed to Market: How quickly can you create and sell? Up-Front Investment: How much do you have to invest before having an offer ready? Up-Sell Potential: What related offers could you present to purchasing customers? Evergreen Potential: Once the offer is created, how much work do you have to put into it to continue selling? Rate them from 0 to 10, with 0 being extremely unattractive, and 10 being extremely attractive. When you’re done with the rating you should add it up, and depending on the score, you’ll have an idea of how promising your idea is. Be particularly wary if there’s a low score in any one of these areas.

1.7. The Hidden Benefit of Competition

1.7.1. When two markets are equally attractive, you should enter the one WITH competition. The Hidden Benefit of Competition is knowing from the start that there’s market of paying customers. That means the Iron Law of the Market is on your side! Become a customer of the competition to learn from them.

1.8. The Mercenary Rule

1.8.1. Here’s the Mercenary Rule: don’t start a business for the money alone because it always takes more effort than you first expect. Building or finishing anything is mostly a matter of starting over and over again, so you should find a market that interests you enough to work on it every day. Don’t ignore “boring” businesses - if you can find something that interests you, those markets can be very attractive.

1.9. The Crusader Rule

1.9.1. The Crusader Rule is a reminder to evaluate new business ideas before you proceed. There’s huge difference between an interesting idea and a solid business. Remember: you have to be able to pay the bills! It’s okay if some ideas don’t have enough market support. Side-projects are valuable too, as long as you cover your finances first. It’s crucial to be objective and analyze the idea before committing to it. This is where the 10 Ways to Evaluate the Market can help you.

1.10. 12 Standard Forms of Value

1.10.1. Product

1.10.1.1. Products are self-contained units of economic value. To make money using Products, you must: Create something that people want. Produce it as inexpensively as possible while also having an acceptable quality. Sell as many units as possible, at the highest price possible for the market. Keep an inventory to deal with future orders. There are many kinds of products, like durable products, consumable products, and intangible products (like MP3 downloads). Products can be duplicated and multiplied, and therefore scale better than other forms of value.

1.10.2. Service

1.10.2.1. A Service is a form of value where you help and provide some type of benefit to someone, in exchange of a fee. Service-oriented business work like this: Provide a skill (either yourself or through employees) other people require but can’t or don’t want to do by themselves. Make sure that you are providing the service with consistent high quality. Attract and retain paying customers.

1.10.3. Shared Resource

1.10.3.1. A Shared Resource is a durable asset that you create once, and then charge the customers for using it many times. To provide a Shared Resource, you must: Create an asset people want to use. Serve as many people as possible without affecting each individual’s experience. Charge enough to maintain and improve the asset over time. Classic examples of this form of value are gyms, museums or amusement parks. It’s critical to find a balance in usage levels of the asset: if you have few customers, you won’t be able to spread out the costs, but if you have too many the asset will be overcrowded, which will diminish the experience for the user.

1.10.4. Subscription

1.10.4.1. Subscription offers provide tangible or intangible benefits on an ongoing basis in exchange for a recurring fee. To create a successful Subscription you must: Provide value consistently to each subscriber. Build a subscriber base and constantly attract more subscribers to compensate for attrition. Bill customers on a regular basis. Retain subscribers as long as possible. The attractiveness of subscription models is its predictability. This form of value ensures a certain revenue in every billing period. The key is to keep customer attrition as low as possible by keeping your subscribers happy and constantly attracting new customers.

1.10.5. Resale

1.10.5.1. Resale is purchasing an asset from another business to sell it later at a higher price. The keys to Resale are: Purchase a product as inexpensively as possible, usually in bulk. Keep the product in good condition until sale. Find purchasers of the product quickly to lower inventory costs. Sell the product for as high a markup as possible. Resale value lies in helping wholesalers sell without having to find individual customers.

1.10.6. Lease

1.10.6.1. A Lease is a form of value where you acquire an asset and then allow another person to use it for a specific period of time in exchange for a fee. The keys to a Lease are: Acquire and asset people want to use. Lease the asset to a paying customers on favorable terms. Protect yourself from negative events, such as damage or loss of the asset. Leasing benefits the consumer by allowing him to use an asset without paying the higher price to acquire it. Because assets have limited useful life, be sure to charge enough to cover the purchase price and repair and replacement costs before it wears out or is lost.

1.10.7. Agency

1.10.7.1. Agency is a business model that focuses on marketing and selling an asset you don’t own. By establishing a new relationship between a source and a buyer, you earn a commission. The keys to success in this form of value are: Find a seller with a valuable asset. Establish contact and trust with potential buyers of that asset. Negotiate the terms of sale until an agreement is reached. Collect the agreed-upon commission from the seller. The benefit for sellers is generating sales that without an agency might not happen. Buyers benefit by finding assets to buy that the agent, whom they trust, filters for them. It’s critical to keep a high enough commission to make the effort worth it.

1.10.8. Audience Aggregation

1.10.8.1. Audience Aggregation focuses on capturing the attention of a group of a people with similar characteristics, and then selling access to that audience to a third party. The keys to provide value are: Identify a group of people with similar characteristics or interests. Consistently attract that group’s attention. Find third parties interested in buying access to that audience. Sell access to that audience without alienating it. This benefits the audience by providing something worthy of their attention. It benefits the advertiser because it gives him attention, which leads to sales.

1.10.9. Loan

1.10.9.1. A Loan is an agreement to let a borrower use a certain amount of resources for a period of time in exchange for a series of payments over a predefined period of time, equal to the original loan plus an interest rate. The keys to Loans are: Have money to lend. Find people who want to borrow that money. Set an interest rate that compensates you for the loan.

1.10.10. Option

1.10.10.1. An Option means taking a predefined action for a fixed period of time in exchange for a fee. (Example: movie tickets!) To provide value with this form of value you must: Identify an action people might want to take in the future. Offer potential buyers the right to take that action before a specific deadline. Convince buyers that the action is worth the price. Enforce the specified deadline on taking action. Options allow the purchaser the ability to take an action without requiring them to do so. Options help keeping specific courses of action open for a period of time before another transaction takes place.

1.10.11. Insurance

1.10.11.1. Insurance focuses on transferring a risk from purchaser to seller in exchange for a series of payments. If something bad happens the insurer is responsible for the bill, and if it doesn’t, the insurer keeps the money. The keys to Insurance are: Create a binding legal contract that transfers the risk of a specific bad thing happening from the policy holder to you. Estimate the risk of that thing happening using available data. Collect the agreed-upon payments over time. Pay out legitimate claims upon the policy. Insurance protects the purchaser from a downside risk. It works because it spreads the risk over a large number of purchasers. Insurers focus on maximizing payments while minimizing claims, and must be on the lookout for “bad risks” and fraudulent activity.

1.10.12. Capital

1.10.12.1. Capital is the purchase of an ownership stake in a business. If you have resources to allocate, you can provide capital to business owners to help them expand their business. To provide capital you must: Have available resources to invest. Find a promising business in which you’d like to invest. Estimate the business’ worth, its future growth, and the possibility of negative scenarios that would cause the loss of your capital. Negotiate the amount of ownership to receive in exchange for the capital. By taking on investors, business owners can gather enough funds to expand quickly. By acquiring a certain percentage of the business, investors benefit from its activities without active involvement. Investors hope to receive a higher rate of return than other methods, like leaving the money in the bank.

1.11. Hassle Premium

1.11.1. People are almost always willing to pay for things that they believe are too much of a pain to take care of themselves. Where there’s a hassle, there’s a business opportunity: the Hassle Premium. The project or task in question may: Take too much time to complete. Require too much effort. Distract from other priorities. Involve too much confusion, uncertainty, or complexity. Require prior experience. Require specialized resources or equipment that’s difficult to obtain. The more hassle a project or task involves, the more people are generally willing to pay for an easy solution, or pay someone to complete the job on their behalf.

1.12. Perceived Value

1.12.1. Perceived Value determines how much your customers will be willing to pay for your offer. The less attractive the End Result, and the bigger the involvement it takes to the user to get the benefit, the lower the perceived value will be. Create forms of value with the least end-user effort and best End Result possible to have the highest perceived value.

1.13. Modularity

1.13.1. Most successful businesses combine multiple Forms of Value to offer value in multiple ways. By making offers Modular, the business can create and improve offers in isolation, and later mix them as necessary. Usually these offers are handled separately and the customer can choose which ones to purchase, dramatically increasing the number of offers the business can create.

1.14. Bundling and Unbundling

1.14.1. Bundling means repurposing value that you already created to create even more value by combining multiple small offers into one large offer. The more offers contained in a bundle, the higher the Perceived Value of the bundle will be. Unbundling is the opposite of bundling, it means splitting an offer into multiple smaller offers. Bundling and unbundling help create value for different customers without having to create something new.

1.15. Prototype

1.15.1. A Prototype is an early representation of what your offer will look like. For best results, create your prototype as similar as possible to the finished model. The more realistic your prototype is, the easier it’ll be for people to understand it and give you valuable feedback. The purpose is not to make it perfect. It’s to quickly create something that you and others can see, evaluate and improve.

1.16. The Iteration Cycle

1.16.1. The Iteration Cycle is a process that you can use to improve anything over time. It has six major steps: Watch: What works? What doesn’t? Ideate: What could you improve? What are your options? Guess: Based on experience, which idea do you think will make the biggest impact? Which? Decide which change to make. Act: Make the change. Measure: Was it positive or negative? Should you keep it or go back? Iteration is a cycle. Once you do it, you repeat it. The more clearly you define what you’re after with each iteration, the better the feedback and the value you’ll receive from each cycle.

1.17. Iteration Velocity

1.17.1. With every new offer, your primary goal should be to work through each Iteration Cycle as quickly as possible. The faster you move through the Iteration Cycle, the higher your Iteration Velocity, and the better your offering will become The iteration cycle is necessary extra work. The problem with creating the final version outright is risk: you are putting a lot of effort in something that may not sell. Iteration may take extra work, but after going through a few cycles, you’ll have a deeper understanding of the market and your offer.

1.18. Feedback

1.18.1. Feedback helps you understand how well is your offering meeting your potential customers’ needs before development is complete, which allows you to make changes before you start selling. Here are a few tips to maximize the value of Feedback: Listen to real potential customers instead of friends and family. Ask open-ended questions. Steady yourself, and keep calm. No one likes hearing that their offer sucks. Take what you hear with a grain of salt. The worst response isn’t empathetic dislike; it’s total apathy. Give potential customers the chance to preorder. If they are willing to buy from you, that’s a green light! If no one is willing to preorder you should ask them why, to find out about their Barriers of Purchase.

1.19. Alternatives

1.19.1. As you develop your offer, you have to choose between the competing Alternatives. You should appreciate the Alternatives your customers face to decide what to include and what to leave out. Once you know the options, you can examine the combination that would make the most attractive offer.

1.20. Tradeoffs

1.20.1. A Tradeoff is a decision that places higher value on one of several competing options. You can’t do everything, resources are limited. When deciding what to include in your offer, you should look for Patterns that will help you realize what your best customers value, and focus on improving your offering for most of your best potential customers most of the time. You can’t make everyone happy: improve everywhere you can, but universal praise is not a useful goal.

1.21. Economic Values

1.21.1. If the benefits of an offering are appealing, there are nine common Economic Values that people consider when evaluating a potential purchase: Efficacy: how well does it work? Speed: how quickly does it work? Reliability: can I depend on it? Ease of Use: how much effort does it require? Flexibility: how many things does it do? Status: what does it tell about me to others? Aesthetic Appeal: how aesthetically pleasing is it? Emotion: how does it make me feel? Cost: how much do I have to give up to get it? Most improvements focus either on convenience (Domino’s delivery) or fidelity (table at Pizza Uno). It’s very difficult to improve both. The trade-offs made in the development give the offering its unique identity and overall value.

1.22. Relative Importance Testing

1.22.1. Relative Importance Testing is a method that helps you determine what people actually want by asking them questions designed to simulate real life tradeoffs. People never accept Tradeoffs unless they are forced to make a Choice. Since perfection doesn’t exist, people happily settle for the Next Best Alternative. By asking the participant to choose, you collect more accurate information about how the participant would respond when faced with a similar choice in the real world. The more sets of questions each participant completes, the more clearly you’ll be able to judge the relative importance of each benefit. Relative Importance Testing helps you define which benefits you should focus on to make your offer as attractive as possible.

1.23. Critical Assumptions

1.23.1. Critical Assumptions are facts or characteristics that must be true in the real world for your offering to be successful. Every business has Critical Assumptions that will define if it can survive or not. The more accurately you can identify and test these assumptions, the less risk you’ll be facing.

1.24. Shadow Testing

1.24.1. Shadow Testing means selling an offer before it actually exists (you have to be upfront with your customers that the offering is still in development). Shadow Testing allows you to get critical feedback: whether or not people are willing to buy your offering. You can minimize the risk of your project by gathering data from real customers as soon as possible.

1.25. Minimum Viable Offer

1.25.1. A Minimum Viable Offer is an offer that provides the smallest number of benefits necessary to make a sale. In other words, it’s a Prototype that people are willing to purchase. Creating a Minimum Viable Offer helps you gather Feedback from real customers quickly, and therefore test the idea’s Critical Assumptions. The purpose of the Minimum Viable Offer is to minimize the risk of the project by keeping the investment small and quickly discovering what works and what doesn’t.

1.26. Incremental Augmentation

1.26.1. Incremental Augmentation is the process of using the Iteration Cycle to add new benefits to an existing offer. Incremental Augmentation helps you minimize the risk by not putting all the pressure in a single iteration. Incremental Augmentation has its limits. To enter a new market, or change the existing one, you may need to create something new.

1.27. Field Testing

1.27.1. Field Testing means creating, using and iterating your offering before offering it to customers. Field Testing is a critical step in the Iteration Cycle, helping you find flaws in your offering. The purpose of Field Testing is to minimize risk, by making sure that the offering works before trying to sell it.

2. Marketing

2.1. Attention

2.1.1. The most important rule of Marketing: Attention is limited. People are expert at filtering, because they can’t pay attention to everything. To be noticed you need to find a way to be more interesting or useful than your competition. You don’t want_ just_ Attention. You want the attention of prospects who will ultimately purchase from you. Business is about making sales, not winning a popularity contest.

2.2. Receptivity

2.2.1. Receptivity is a measure of how open s person is to your message. People ignore what they don’t care about. The form and customization of your message influences how receptive people are the information it contains. The two primary components of Receptivity are “what” and “when.” People are more receptive to certain things at certain times.

2.3. Remarkability

2.3.1. Being Remarkable is the best way to attract Attention. It makes your offering worth noticing and talking about. You should design your offer to be Remarkable in order to pique your prospect’s curiosity. Aim for the edges, that’s where remarkability is.

2.4. Probable Purchaser

2.4.1. Your Probable Purchaser is the type of person who is perfectly suited to what you are offering. Don’t try to get everyone’s Attention. Focus on getting the attention of the right people at the right time. By spending your limited resources on the people who are already interested in what you are offering, you’ll maximize the effectiveness of your efforts.

2.5. Preoccupation

2.5.1. In order to earn the Attention of a prospect, you must divert their attention from what they’re already doing. It’s best to assume your prospects begin in a state of Preoccupation: they’re doing something else. The best way to break a potential prospect’s Preoccupation is to provoke a feeling of curiosity, surprise, or concern. The stronger and more emotionally compelling the stimuli, the easier it is to attract attention.

2.6. End Result

2.6.1. Marketing works better when it focuses on the End Result. People don’t buy books, they buy knowledge. It’s more comfortable to focus on features, on what your offer does, but it’s more effective to focus on benefits, what your offer_ provides._ The End Result is usually an experience related to a Core Human Drive.

2.7. Qualification

2.7.1. Qualification is the process of determining whether or not a prospect is a good customer before they purchase from you. Qualification helps to avoid wasting time and energy on customers that aren’t a good fit. Not every customer is a good customer. Customers that require more than what they are worth, aren’t worth attracting in the first place. Some businesses actively encourage their customers to purchase from the competition if they are not a good fit. The more clearly you can define your ideal customer, the better you can screen out the customers that are not worth your effort, and the more you’ll be able to focus on your best customers.

2.8. Point of Market Entry

2.8.1. A Point of Market Entry is the point where a potential customer becomes receptive to your offering. It’s highly likely that you won’t care about wheel chairs until you need one. Certain markets have clearly defined entry and exit points, like diapers. Other markets are more imprecise. It’s best to find out when people are interested in hearing from you before you reach out in order to avoid wasting resources. If you can get a prospective customer’s attention as soon as they become interested in what you’re offering, you become the standard by which competition will be evaluated. It’s important to discover where your probable purchasers start looking for information after crossing the interest threshold.

2.9. Addressability

2.9.1. Addressability is a measure of how easy it is to get in touch with people who might want what you’re offering. It’s far better to focus on an addressable audience, like skaters, than a non-addressable one, because Receptivity is varies from audience to audience. By targeting an addressable audience, the risk of not reaching prospects decreases greatly.

2.10. Desire

2.10.1. You need to produce a strong feeling of Desire in your customers for they to want what you have, and to be willing to purchase from you. Provoking desire usually makes people uncomfortable because they fear that they are “manipulating” people, but in reality no one wants something that they don’t already desire. The key is discovering what people already want, and then presenting an offer that intersects with the preexisting desire. Your job is not to convince people, but to help them convince themselves that your offering will help them get what they want. People’s wants start at the Core Human Drives. The more drivers you connect with, the more effective your offering will be.

2.11. Visualization

2.11.1. The most effective way to get people to want what you offer, is to encourage them to Visualize how their lives would be if they accept it. The best way to help your customers visualize is to expose them to as much sensory information as possible. The goal of Visualization is to guide the customer to stop comparing and start wanting.

2.12. Framing

2.12.1. Framing is the act of emphasizing the critical details of your offering and deemphasizing the others. You can’t include every detail of your message. We rely on framing because we have limited time and limited attention. By emphasizing certain benefits of your offer, you can maximize persuasive power. Framing is not the same as lying. Don’t leave out information that your customers have the right to know: being less-than-truthful will decrease customer satisfaction and permanently harm your Reputation.

2.13. Free

2.13.1. Giving something away for Free attracts attention quickly. People love getting something for nothing. Free gives your potential customers a chance to experience the value you provide. It may net you sales that you wouldn’t have had otherwise. It’s critical to remember that attention alone doesn’t pay the bills. Focus on giving away real value that attract real, paying customers.

2.14. Permission

2.14.1. Permission is a real asset: when your prospective customers ask you to follow-up with more information, you’re in prime position to make a sale. Asking for (and obtaining) Permission to follow-up is more valuable than interruption-based advertising like TV commercials. The best way to get Permission is to ask for it. Whenever you provide value to people (e.g.: Free), ask them if it’s okay to continue to give them more value in the future. The goal is to make the list of prospects that have given you permission to grow. The more it grows, the more sales you’ll eventually land. Don’t abuse the privilege. Make it clear for your customers what they’ll be getting and how it’ll benefit them. Never spam!

2.15. Hook

2.15.1. A Hook is a single phrase or sentence that describes an offer’s primary benefit. When creating a Hook, emphasize what’s uniquely valuable about your offer and why people should care. Remember: it takes time. Crafting a Hook is a creative exercise. The better your Hook, the more Attention you’ll grab, and the easier it’ll be for your message to spread.

2.16. Call-to-Action

2.16.1. If you want a prospect to take the next step you need to give them a Call To Action (CTA): tell them exactly what to do. Visit a website, check your e-mail, call a phone number. The key for an effective CTA is to be as simple, clear and obvious as possible. The best CTAs call directly for a sale or for Permission to follow up.

2.17. Narrative

2.17.1. Narrative – storytelling – is part of human nature. Creating a compelling story is a great way to improve an offer. Most compelling stories follow a typical format: the story of the Hero. Your customers want to be heroes. They want to be successful, powerful, admired and determined. Telling a story of someone who has already walked the path your prospect is considering is a powerful way to make them interested. The more vivid, clear and compelling your story, the more prospects you’ll attract.

2.18. Controversy

2.18.1. Controversy means publicly taking a position that not everyone will agree with, approve of, or support. Used constructively, it’s very effective to attract Attention. If you agree with everyone, your position is boring and no one will care. It’s okay to disagree, call out or position against something, because it provokes discussion, and discussion is Attention. Controversy with an ethical purpose is valuable. Controversy for the sake of controversy is not. Always keep your goal in mind.

2.19. Reputation

2.19.1. Reputation is what people think about a company or offer. Building a strong reputation is very valuable; people are willing to pay more for a good reputation. It’s critical to understand that you don’t control your reputation, people will decide what your reputation is. You can’t “manage” it. You can only improve it over time by making sure that those who do business with you are glad they did. Building a good reputation takes time and effort, but it’s the most effective kind of marketing there is.

3. Sales

3.1. Transaction

3.1.1. A Transaction is an exchange of value between two or more parties. Sales are the only point where resources flow into the business, so Transactions are critical. You can only transact with things that are Economically Valuable. The goal is to make the first profitable Transaction as quickly as possible, because that’s when you transition from a project to a business.

3.2. Trust

3.2.1. Without Trust, no Transaction will take place. Building a trustworthy Reputation over time through honesty and fair dealing is the best way to build Trust. The easier both parties can verify that the other party is trustworthy, the easier it is to make a Transaction.

3.3. Common Ground

3.3.1. Common Ground is a state of overlapping interests between two or more parties. It’s far easier to reach Common Ground if you understand the needs of your Probable Purchaser. Aligning interests is critical to reach Common Ground, and consequently, a Transaction. Sales isn’t about convincing someone to buy what they don’t want or need. Negotiation is the process of exploring different paths to reach Common Ground. The more paths you explore, the more likely you’ll find interests that overlap.

3.4. Pricing Uncertainty Principle

3.4.1. The Pricing Uncertainty Principle states that all prices are arbitrary and malleable. Pricing is an executive decision. You can charge whatever you want! The key is being able to support the asking price for a customer to accept it. You must be able to provide a Reason Why the price is worth paying. Keep in mind that, in general, people prefer to pay as little as possible for what they want (with some exceptions, discussed in Social Signaling).

3.5. Four Pricing Methods

3.5.1. There are 4 Pricing Methods that can help you put a price on what you sell: replacement cost, market comparison, discounted cash flow/net present value, and value comparison. The Replacement Cost method answers the question: “how much would it cost to replace?” Figure out how much would it cost to replace, add your desired mark-up, and set your price. The Market Comparison method answers the question: “how much are other things like this selling for?” Find a similar offer, and price yours accordingly. The Discounted Cash Flow (DCF)/Net Present Value (NPV) method answers the question: “how much is it worth if it can bring in money over time?” The more profit the business generates each month, the higher the price. The Value Comparison method answers the question: “who is this valuable to?” This is typically the best way to price your offer, since its value to a specific group can be quite high, resulting in a better price.

3.6. Price Transition Shock

3.6.1. When you change the price of an offer, the effects aren’t limited to your current target market. Often, you’ll experience a sudden shift in the target market your offer appeals to: a Price Transition Shock. A change in prices can change your typical prospect overnight. As you test different pricing strategies, you’ll notice certain thresholds where you stop appealing to certain types of customers and start appealing to customers with very different characteristics.

3.7. Value-Based Selling

3.7.1. Value-Based Selling is the process of understanding and reinforcing the reasons why your offer is valuable to the purchaser. Though Value-Based Selling, you increase the likelihood of a transaction as well as the price the purchaser is willing to pay. Value-Based Selling is about listening, not talking. By asking your prospects what they need, you: Increase the prospect’s confidence in you and your understanding of the situation. Discover information that will help you emphasize how valuable your offer is, and how to Frame your price appropriately. Discover how, why and how much your offer will benefit the customer, and you’ll be able to connect more effectively, and ultimately land more sales. Always sell based on the value your offer provides, not the cost.

3.8. Education-Based Selling

3.8.1. Education-Based Selling is the process of making your prospects better and more informed customers. By investing time and energy in making your customers smarter, you simultaneously build Trust and make them more interested in your offer. Remember that to do this properly, you have to know more than your customers. Otherwise, you’ll scare them away.

3.9. Next Best Alternative

3.9.1. Your Next Best Alternative is what you’ll do if you can’t find Common Ground with the other parties. Remember: the other party always has a Next Best Alternative as well. Understanding the other party’s Next Best Alternative is extremely helpful: you can structure the agreement to make it more attractive than the other option. In every negotiation, the power lies with the party that is able and willing to walk away from a bad deal. The more attractive your alternatives, the more you’re willing to walk away, and the better your deals.

3.10. Exclusivity

3.10.1. In most sales situations, it’s in your best interest to maintain Exclusivity: creating a unique offer or quality that other firms can’t match. If you’re the only person or company that offers what your prospect wants, you’re in a very strong position to negotiate on favorable terms . Exclusive offers make it much easier to maintain high Perceived Value, since there’s no direct competition. Exclusive offers are easier to create when you’re creating something new, which means an exclusivity strategy makes the most sense for Products and Services.

3.11. Three Universal Currencies

3.11.1. In every negotiation, there are 3 Universal Currencies on the table: Resources. Tangible items like money, oil, etc. Time. The universal limit of capacity. Flexibility. The cost of not doing something else, which is a very real Opportunity Cost Focus on the appropriate trade-offs between the parties to find Common Ground in these Currencies. By mixing these currencies in different ways, it’s easier to reach an agreement that the parties can agree with.

3.12. Three Dimensions of Negotiation

3.12.1. The 3 Dimensions of Negotiation are setup, structure, and discussion. Setup involves setting a stage for a positive outcome of the negotiation. The environmental factors play a huge role in the negotiation, so it pays to do appropriate research to gain as much knowledge as possible about your negotiating partner. Structure is the terms of the proposal. By thinking on the Structure of your proposal in advance, you can have valuable options for your partner to consider, and eventually reach Common Ground. Discussion is actually presenting the offer to the other party. This is where you work on the details, remove Barriers to Purchase, and more. Discussion continues until the parties reach an agreement or quit negotiating. Prepare the Three Dimensions of Negotiation to increase greatly the chances of reaching an agreement that benefits both parties.

3.13. Buffer

3.13.1. A Buffer is a third party empowered to negotiate on your behalf. Agents, attorneys, etc. are all examples of Buffers. Depending on the agreement, your Buffer’s priorities may be very different from your own. Be mindful of Incentive-Caused Bias. If possible, work with a Buffer who is willing to accept a flat fee. Their interests will be more aligned with yours when they are paid no matter what happens. Don’t let your buffer replace your own judgment. Don’t give total control of your decisions or resources to your Buffer.

3.14. Persuasion Resistance

3.14.1. One of the things that makes prospects uncomfortable around salespeople is the feeling that they’re going to get the “hard sell” or be tricked into agreeing to something that’s not in their best interest. Persuasion Resistance is a natural defense against pressure. Reactance occurs when a prospect senses that someone is trying to compel them to do something; they automatically resist and attempt to move away from the conversation. Desperation is a negative trust signal. Chasing is a threat signal. It’s much better to present yourself with confidence.

3.15. Reciprocation

3.15.1. Reciprocation is the desire most people feel to “pay back” for what they received. This is one of the most powerful psychological tendencies underlying human cooperation. The desire to reciprocate is not necessarily in proportion to the benefit provided. The more value you can provide upfront, the more likely it is that people will feel the need to reciprocate. Being generous is one of the best things you can do to build your Reputation and to improve your results as a salesperson.

3.16. Damaging Admission

3.16.1. A Damaging Admission is an acknowledgment of the potential risks or drawbacks an offer may have. Making a Damaging Admission can actually increase your prospects’ Trust in your offering, because it shows integrity. Be upfront regarding your drawbacks and Trade-offs. They know you’re not perfect, so don’t pretend to be.

3.17. Barriers to Purchase

3.17.1. Selling anything is largely the process of identifying and eliminating Barriers to Purchase: anything that prevents your prospect from buying what you offer. These are the five standard objections in every sales process: Loss Aversion: It costs too much. Makes spending feel like a loss. It won’t work. It won’t work for me. I can wait. It’s too difficult. It’s smart to structure your offer with those objections in mind: Objection #1 is best addressed via Framing and Value-Based Selling. If it’s clear that the value of your offer exceeds the asking price, the objection is moot. Objections #2 and #3 are best addressed via Social Proof. Show the prospects how others like them are benefiting from the offer. That’s why Referrals are such a powerful tool. Objections #4 and #5 are best addressed via Education-Based Selling. If the customer doesn’t realize they have a problem, they won’t be looking for a solution. Focus your early efforts in making them smarter and then helping them Visualize what would happen if they proceed. Once you have their Attention and Permission, there are two possible tactics if they still have objections: Convince them that the objection isn’t true. Convince them that the objection is irrelevant. If the prospect still doesn’t buy, it may be a problem of Power. Always try to negotiate with the decision-maker, he who has the Power to buy.

3.18. Risk Reversal

3.18.1. Risk Reversal is a strategy that transfers some (or all) of the risk of a transaction from the buyer to the seller. The seller agrees to make things right in advance if the purchaser doesn’t end up satisfied. Risk Reversal is a great way to eliminate some Barriers to Purchase. This strategy may be feel uncomfortable to the seller as well, because no one wants to lose. The difference is that a seller can spread that risk among many customers. The customer can’t do the same. By eliminating the risk of purchase, you’ll close more sales and eventually make more money than what you’ll lose if some customers take advantage of your generosity.

3.19. Reactivation

3.19.1. Reactivation is the process of convincing past customers to buy from you again. Reactivation is a quicker, simpler and more effective way of increasing revenue than attracting new customers, because those who are reactivated already know you and trust you. Your cost of customer acquisition is extremely low. Reactivation works better if you have Permission from your customers to follow up. Reactivation is a great strategy to go back to every now and then to increase revenue.

4. Value Delivery

4.1. Value Stream

4.1.1. A Value Stream is the set of all steps from the start of your value creation until the delivery of the end result to your customer. The Value Stream is basically the combination of your Value Creation and Value Delivery processes. The best way to understand your Value Stream is to diagram it. This can help you see where you can improve the value of your offering. It’s best to try to make your Value Stream as small and efficient as possible. The longer the stream, the greater the risk of things going wrong.

4.2. Distribution Channel

4.2.1. A Distribution Channel describes how your offer will be delivered to the end user. There are two types of Distribution Channels: Direct-to-user Distribution: single channel, from the business directly toe the end user. This is the case of many services like getting a haircut or a car wash. It’s effective but you can only serve as many customers as your time and energy allow. Intermediary distribution: multiple channels, usually through Resellers. The business that created the product can sell it to many Resellers, increasing its reach and sales. The drawback is that it requires giving up certain control over your delivery process, which could hurt your Reputation if the other Reseller doesn’t perform well. You can’t set and forget your Distribution. If you work with multiple channels, you need to make sure that they are representing your business well.

4.3. Expectation Effect

4.3.1. A customer’s perception of quality relies on expectations and performance. This relationship is the Expectation Effect: Quality = Expectations + Performance After a purchase is made, the performance of the offering must surpass the expectations for the customer to be satisfied. If performance is better than expectations, the perception of the offering will be high. Do whatever you can to provide something that unexpectedly delights your customers.

4.4. Predictability

4.4.1. Predictability means providing exactly what the customer expects. Unexpected surprises are only good as long as you provide what the customer is looking for. There are three factors that influence Predictability: Uniformity. It means delivering the same characteristics every time. Consistency. It means delivering the same value over time. Reliability. It means being about to count on delivery of the value without error or delay. The more predictable you become, the more you’ll increase the perceived quality of your offering.

4.5. Throughput

4.5.1. Throughput is the rate at which a system achieves its desired goal. It’s the measure of effectiveness of your Value Stream. It’s measured in the form of units/time: the higher the number of units and the lower the time, the higher the throughput. To measure it you need clearly defined objectives: Dollar Throughput is a measure of how quickly your business creates a dollar of profit. Unit Throughput is a measure of how much time it takes to create an extra unit to sale. Satisfaction Throughput is a measure of how much time it takes to create a happy customer. By improving the process you create and deliver value, you will improve quality and customer satisfaction.

4.6. Duplication

4.6.1. Duplication is the ability to reliably reproduce something of value. Duplication allows you to make copies of your offer quickly and inexpensively, making it more widely available in a cost-effective way. To create something that doesn’t require your direct involvement, you need to be able to duplicate effectively. If you have to be personally involved with every customer, there’s an upper limit on how many customers you can serve.

4.7. Multiplication

4.7.1. Multiplication is duplication for an entire process or system. There’s an upper limit on what a single business can produce. By creating identical business systems based on a proven model, a business can deliver value to more customers. Multiplication is what separates small businesses from huge businesses.

4.8. Scale

4.8.1. Scale is the ability to reliably duplicate or multiply a process as volume increases. Scalability is limited by the amount of human involvement required in the process. The smaller the level of required human attention in the process, the more the business can produce. Products are easier to Duplicate, while Shared Resources are easier to Multiply. People don’t scale. On the contrary, the larger and more pressing the demand, and the more demands that need to be addressed, the lower the effectiveness. The smaller the level of human involvement, the more scalable the business.

4.9. Accumulation

4.9.1. Accumulation is about small helpful or harmful inputs and behaviors that produce huge results over time. Accumulation isn’t always positive. Incremental Augmentation and the Iteration Cycle are good examples of how much Accumulation can improve the value of your offering. The more small improvements you make over time, the better the results.

4.10. Amplification

4.10.1. When you make a small change to a scalable system, the results are huge. That’s Amplification. The best way to identify Amplification opportunities is look for things being duplicated or multiplied. The larger the system, the larger the result of the small change.

4.11. Barrier to Competition

4.11.1. Don’t focus on competing, focus on delivering more value. Every improvement you make builds a Barrier to Competition making it more difficult for competitors to keep up. The more time you spend looking at the competition, the less time you have to build your business. Every improvement you make to your Value Stream, makes it harder for your competition to follow.

4.12. Force Multiplier

4.12.1. Force Multipliers are tools that help you Amplify your effort to produce more output. A hammer is a force multiplier. Investing in Force Multipliers means that you’ll get more done with the same amount of effort. Generally, the only good use of debt or outside capital is when it gives you access to Force Multipliers that you wouldn’t be able to access any other way. Force Multipliers free up your time, energy and attention to focus on building your business instead of simply operating it.

4.13. Systemization

4.13.1. A system is a process made explicit and repeatable. Systemization is the act of creating a new system. The primary benefit of creating a System is that you can examine the process and make improvements. Developing Systems help everyone do what they have to do with minimum misunderstanding. It helps with the communication in the process. Creating systems may feel like extra work, but they ultimately make your work easier. The better your system, the better your business.

5. Finance

5.1. Profit

5.1.1. Profit means bringing in more money than you spend: Profit = Income - Expenses For a business to survive, it must eventually make profit. You can’t operate at loss forever. Profits also provide a “cushion” to the business to deal with unexpected events. Profits are important, but they don’t have to be only goal for starting a business. Exploring interests and helping others, for example, are also valid reasons to start a business.

5.2. Profit Margin

5.2.1. Profit Margin (often abbreviated to “margin”) is the difference between how much revenue you capture and how much you spend to capture it, expressed in percentage terms. % Profit Margin = ((Revenue - Cost) / Revenue) * 100 If you spend $1 to get $2, that’s a 50 percent Profit Margin. Profit Margin is not the same as markup, which represents how the price of an offer compares to total cost. % Markup = ((Price - Cost) / Cost) * 100 If the cost of an offer is $1 and you sell it for $2, your markup is 100%, Margins can never be more than 100%, but markups can be 200%, 500%, or 10,000%. Businesses often use Profit Margin as a way of comparing offers.

5.3. Value Capture

5.3.1. Value Capture is the process of retaining some percentage of the value provided in every Transaction. For example, if you bring $1 million of revenue to a client, and you charge $100,000, you are capturing 10% of the value you created. The more value you capture, the less attractive your offer becomes. There are two major approaches to Value Capture: Maximization. An organization should try to capture as much value as possible. Minimization. An organization should capture as little value as possible, as long as it remains Sufficient. As long as you bring enough to cover your needs, there’s no need to capture every cent. Create as much value as you can, so your captured value is worth it.

5.4. Sufficiency

5.4.1. Financial Sufficiency is the point where a business is bringing enough profit that people find it worthwhile to keep going for the foreseeable future. Maximizing profits is not everything, but you can’t create value if you can’t pay the bills. To ensure you’re maintaining financial sufficiency, calculate your Target Monthly Revenue (TMR). If you bring more than your TMR each month, you are sufficient. Sufficiency is subjective. Different businesses have different sufficiency points. If you reach Sufficiency, you are successful, regardless of how much money you make.

5.5. Valuation

5.5.1. Valuation is an informed estimate of the total worth of a company. The higher a business’ revenues, the stronger the company’s Profit Margins, the higher its bank balance, and the more promising its future, the higher its Valuation. The higher the Valuation, the easier it is to borrow money, the higher the per-share price, and the higher the price in the case of an acquisition. Valuation is also important if you intend to take on investors. Higher Valuations = more money per share sold to investors. Many companies base their financial decisions on what will increase the business’ Valuation.

5.6. Cash Flow Statement

5.6.1. The Cash Flow Statement is straightforward: it’s an examination of a company’s bank account over a certain period of time. Think of it like a checking account ledger: deposits of cash flow in, and withdrawals of cash flow out. Ideally, more money flows in than flows out, and the total never goes below zero. Every Cash Flow Statement covers a specific period of time: a day, a week, a month, a year. The time period of the report depends on the purpose. Cash tends to come from three primary sources: operations (selling offers and buying inputs), investing (collecting dividends and paying for capital expenses), and financing (borrowing money and paying it back). The nice thing about cash is that it doesn’t lie. Barring outright fraud, cash is either in the bank account or it’s not. If the company spends a lot of money, but less is coming in, the business’ cash position will decrease over time. There’s little room for “creative interpretation.”

5.7. Income Statement

5.7.1. An Income Statement is a financial report that calculates a business’ profitability. Cash is important, but it’s not the whole picture. Cash is not Profit. It’s possible to have a nice, comfortable cash position for a while, but lose money with every sale. If the business manages an inventory or extends credit to customers, a simple cash flow analysis can be misleading. In order to determine whether or not your sales are profitable, you need to be able to track which sales and expenses are related. Accrual accounting: revenue is recognized immediately when a sale is made (i.e. a product is purchased, a service is rendered, etc.), and the expenses associated with that sale are incurred in the same time period. Matching Principle: by matching each sale with the expenses incurred in the process of making that sale, it’s possible to see if you’re making a profit. The matching principle, for all of its benefits, introduces many sources of potential bias in the Income Statement via assumptions and projections.

5.8. Balance Sheet

5.8.1. A Balance Sheet is a snapshot of what a business owns and what it owes at a particular moment in time. You can think of it as an estimate of the company’s net worth at the time the Balance Sheet was created. Balance Sheets always cite a specific day, and use this calculation: Assets - Liabilities = Owner’s Equity Assets are things the company owns that have value: products, equipment, stock, etc. Liabilities are obligations the firm hasn’t yet discharged: loans, financing, etc. What’s left over when you discharge all of the business’ liabilities is Owner’s Equity, the company’s “net worth.” What makes the Balance Sheet “balance” is the secondary form of the calculation, which is a rearrangement of the first equation: Assets = Liabilities + Owner’s Equity Both sides of the Balance Sheet are the same. The Balance Sheet always balances. If it doesn’t balance, you’ve made an error.

5.9. Financial Ratios

5.9.1. Financial Ratios are beneficial because they allow you to make comparisons very quickly. Profitability ratios indicate a business’ ability to generate Profit. (“How profitable is the company or offer?”) Leverage ratios indicate how your company uses debt. (“How much debt does the company have, and can they pay it back?”) Liquidity ratios indicate the ability of a business to pay its bills. (“How much cash does the company have, and can they pay their bills?”) Efficiency ratios indicate how well a business is managing assets and liabilities. (“How much inventory does the business have, and how long does it take to collect payments for receivables?”) Every business has a small number of important ratios to consider, so it’s worthwhile to do a bit of research to see what they are for your industry.

5.10. Cost-Benefit Analysis

5.10.1. Cost-Benefit Analysis is the process of examining potential changes to your business to see if the benefits outweigh the costs. When conducting a Cost-Benefit Analysis, it’s important to include costs and benefits that aren’t purely financial. Before making a decision, evaluate the total costs and benefits. If the data you’re examining doesn’t lead to make changes that improve your business, you’re wasting your time.

5.11. Four Methods to Increase Revenue

5.11.1. If you want your business to bring in more money, there are only 4 Methods to Increase Revenue: Increasing the number of customers. Increasing average transaction size. Try to get each customer to purchase more. Increasing the frequency of transactions per customer. Try to get each customer to purchase more often. Raising your prices. Remember the lesson of Qualification: not every customer is a good customer. Always focus the majority of your efforts on serving your ideal customers. The more ideal customers you attract, the better the business.

5.12. Pricing Power

5.12.1. Pricing Power is your ability to raise your prices over time. The less value you capture, the greater your pricing power. It’s related to the economic concept of “price elasticity”: how sensitive are your customers to price variations. Pricing Power is important because raising your prices allows you to overcome inflation or increased costs. Without pricing power, your business may not be able to remain alive if it faces higher expenses. The higher the prices you can command, the more reliably you’ll be able to maintain Sufficiency.

5.13. Lifetime Value

5.13.1. Lifetime Value is the total value of a customer’s business over the lifetime of their relationship with your company. The more they purchase from you, and the longer they stay with you, the better the value. the higher the Lifetime Value, the more you can do to keep them happy. By understanding how much a customer purchases and how long they stay with you, you can place a tangible value on each new customer. It’s much better to operate on markets with high Lifetime Value.

5.14. Allowable Acquisition Cost

5.14.1. Allowable Acquisition Cost (AAC) is the marketing component of the Lifetime Value. The higher the Lifetime Value of your customers, the more you can spend to attract new customers. To calculate your AAC follow these steps: Start with your average customer’s Lifetime Value. Subtract your Value Stream costs. Finally, subtract your Overhead divided by your customer base (which represents your Fixed Costs). The higher the Lifetime Value, the higher the AAC. The more each new customer is worth, the more you can spend to attract them and keep them happy.

5.15. Overhead

5.15.1. Overhead is the minimum ongoing resources required for your business to continue operations. The lower your Overhead, the less revenue you need to keep going. Overhead is critical if you’re building your company on a fixed amount of capital. The faster you spend it, the more quickly you’ll need to bring revenue. A lower Overhead means more flexibility.

5.16. Costs: Fixed and Variable

5.16.1. Fixed Costs exist no matter how much value you create. Your Overhead is a Fixed Cost. Variable Costs are directly related to how much value you create. More value, more costs. Reduction in Fixed Costs Accumulate. Reduction in Variable Costs are Amplified by volume. The more you understand your costs, the more ways to to produce value without spending everything you’ll find.

5.17. Incremental Degradation

5.17.1. Incremental Degradation is the process of making a business offer worse and worse by trying to cut costs. Saving money doesn’t help it you need to lower the quality of your offering to do it. Cost saving measures Accumulate over time, and end up having an impact on quality. Cutting costs can help to increase the Profit Margin, but it usually comes at a steep price. Cutting costs can only take you so far. Creating value will always cost some amount of money, so there’s a limit to this strategy. Creating and delivering value is a much better way to improve your business. There’s no limit to how much value you can provide. Control your costs, but remember why your customers are buying from you.

5.18. Breakeven

5.18.1. Breakeven is the point where your business’ total revenue exceeds its total expenses. It’s the point where the business starts creating wealth. The business’ initial revenue is not wealth: you need to cover your initial investment first. Your breakeven point will change constantly, revenue and expenses fluctuate with time. The more revenue you bring and the less you spend, the more quickly you’ll reach Breakeven.

5.19. Amortization

5.19.1. Amortization is the process of spreading the cost of a resource investment over its estimated useful life. Amortization can help you determine if a potential investment is worth it. Amortization is a prediction, it depends on an accurate assessment of useful life, and it doesn’t work well if you sell less than you thought you would, or if the equipment wears out faster than you thought. If you’re wrong in your assessment, your investment may cost more than expected. Using Amortization is smart, but remember it’s a prediction, so act accordingly.

5.20. Purchasing Power

5.20.1. Purchasing Power is the sum total of all liquid assets a business has at its disposal. The more the better, as long as you use that power wisely. Purchasing Power is what you use to pay your Overhead and supplies. If you run out of Purchasing Power, you’re out of business. Keeping a track of your Purchasing Power makes running a business easier and less stressful.

5.21. Cash Flow Cycle

5.21.1. The Cash Flow Cycle describes how the cash Flows in and out of business. Receivables are promises of payment you’ve received from others. They feel like sales, but with a catch: the promise has to be fulfilled for the Receivable to translate into cash. Debt is a promise you make to pay someone at a later date. They are helpful because the later you pay, the more cash you have at your disposal at the present. The catch is that it usually costs additional money in form of interests. To bring in more cash it’s better to speed up collections and reduce the extension of credits. And always remember that you don’t have to extend credits if it doesn’t make sense for your business. Maximizing your cash tackles the issue directly: bring in more revenue and cut costs.

5.22. Opportunity Cost

5.22.1. Opportunity Cost is the value you’re giving up for making a Choice. Whenever you invest time, energy or resources in something, you are also choosing not to invest it in something else. Opportunity Cost is important because it’s hidden. Paying attention to what you’re giving up helps you evaluate your decision. Don’t obsess over your Opportunity Cost. Don’t try to analyze everything, just consider what appear to be the best reasonable alternatives at the time.

5.23. Time Value of Money

5.23.1. A dollar today is worth more than a dollar tomorrow. Calculating the Time Value of Money is a way of making choices when dealing with Opportunity Costs. The more profitable options you have to invest that dollar, the more valuable it is. Time Value of Money can help you determine which options to choose and how much you should spend, given the alternatives.

5.24. Compounding

5.24.1. Compounding is the Accumulation of gains over time. Compounding is important because it creates the possibility of huge gains in a short period of time. By reinvesting the revenue your business generates over and over, you can multiply your original investment many times. Accumulating gains will produce huge results. The trick is to be patient.

5.25. Leverage

5.25.1. Leverage is the practice of using borrowed money to magnify potential gains. If you have an investment that promises to double, you can make 10x if you borrow money and make that investment five times. Leverage is a form of financial Amplification. It magnifies gains and losses. Using Leverage is dangerous. Never do it unless you are aware of the financial risks for yourself and your business.

5.26. Hierarchy of Funding

5.26.1. If your business needs to buy equipment or to hire employees, chances are you require Funding. The Hierarchy of Funding describes various methods of obtaining funding for a business. In order to acquire Funding, it’s often necessary to give up a certain amount of control over the operations. No one gives money away for nothing. The more money you ask for, the more control they’ll want. The higher you climb, the more funding you get and the more control you give up: Personal Cash. The best form of financing is to invest your own money. Personal Credit. Easy and quick if your needs don’t exceed a few thousand dollars. Personal Loan. Typically made by friends/family. Be careful because failure to pay back may harm your personal relationships. Unsecured Loan. Typically made by banks or credit unions. It’s used for small amounts, usually doesn’t require collateral so the interest will be higher. Secured Loan. It requires collateral. If you don’t make the payments, the lender can seize the property signed as collateral. Bond. Debt sold to individual lenders. Instead of asking a bank, a business asks other individuals directly. Receivable Financing. Special type of secured lending unique for business. The collateral is the business receivables. The bank can force the business to pay the loan before anything else, even salaries. Angel Capital. The “angel” investor gives you Capital in exchange for partial legal ownership of the business. Some angels offer advice, but they usually can’t make business decisions. Venture Capital. VCs are very wealthy and they offer very large amounts of capital. It happens in “rounds” and there’s a lot of negotiation involved. VCs require a lot of control, usually a seat in the company’s board of directors. Public Stock Offering. It involves selling partial partial ownership of the company to investors on the open market. Whoever owns the most shares of the company controls it, so “going public” is very risky in terms of control. Public Stock Offerings are usually used by angel investors and VCs to exchange ownership for money. The more control you have to give up, the less attractive the funding. More opinions means slower operations. It’s not uncommon for investors to remove executives that are not performing well, even if they are the founder of the company. (e.g.: Steve Jobs)

5.27. Bootstrapping

5.27.1. Bootstrapping is the art of building and operating a business without outside funding. Bootstrapping allows you to grow your business while controlling it 100%. If you accept Funding, make sure that you use it to do things that you couldn’t otherwise. Bootstrap as far as you can go, then move up the Hierarchy of Funding as needed.

5.28. Return on Investment

5.28.1. Return on Investment (ROI) is the value created from an investment of time or resources. ROI can help you make decisions between competing alternatives by asking yourself the question: what brings a bigger ROI? The return on every investment is always directly related to how much the investment costs. The more you spend, the lower your return. Every future ROI calculation is a semi-educated guess. Nothing is a sure bet, you can only know your exact ROI after your investment is made.

5.29. Sunk Cost

5.29.1. Sunk Costs are investments of time, energy and resources that can’t be recovered once they’re made. Continuing to invest there is a waste. The concept of Sunk Costs is very hard to put into practice. People have hard time walking away something that they’ve invested a lot in. In reality, there’s nothing you can do. Making mistakes is inevitable. What’s important is to learn from those mistakes. Sometimes quitting, changing directions, is the smart move.

5.30. Internal Controls

5.30.1. Internal Controls are a set of specific Standard Operating Procedures a business uses to collect accurate data, keep the business running smoothly, and to spot trouble. The better a company’s internal controls, the more reliable its financial reports, and the more confidence you can have in the quality of the company’s operations. Budgeting is the act of estimating future costs and taking steps to ensure that these estimates aren’t exceeded without good reason. Supervision is important in businesses that rely on employees or outside firms for important parts of its business process. Compliance is necessary when a business operates in an industry affected by government regulations. Theft and Fraud Prevention is important to protect against the risk of financial loss by an unscrupulous party. In all of these areas, it’s useful to have a dispassionate third-party audit your data and control processes.

6. The Human Mind

6.1. Caveman Syndrome

6.1.1. Human biology is optimized for the world that existed 100,000 years ago, not for the world today. Caveman Syndrome is a way of recognizing that your brain and body simply aren’t optimized for today’s world. Part of the challenge is facing 16 hours work days, instead of the physical survival of the past. Don’t be too hard on yourself. Nobody was built for the world as it is today.

6.2. Performance Requirements

6.2.1. Your body has Performance Requirements. If you don’t give your body what it needs to run, you’ll stop functioning before you reach your goals. You need nutrition, rest and exercise to be productive. Here are some tips: Eat high-quality food. Exercise regularly. Get at least seven to eight hours of sleep each night. Get enough sun, but not too much. Feed your brain the raw materials it needs to run. You may need to get some of these in supplement forms. It’s a good idea to Experiment to see what works for you to improve your energy, productivity and mood.

6.3. The Onion Brain

6.3.1. To understand human behavior, it’s important to understand the brain. The Onion Brain is an easy way to remember how the brain is constructed: it has layers, like an onion. At the core is the hindbrain. It’s essentially responsible for keeping you alive, sending all the necessary signals for you to do what you need to survive. Above the hindbrain is the midbrain, responsible for processing sensory data, emotion, memory and Pattern Matching. The midbrain is constantly predicting what will happen next. Above the midbrain is the forebrain., responsible for self-awareness, logic, etc. Basically everything that makes us distinctly human. One of the best things you can do to get more done is to dissociate yourself from the voice in your head. The voice isn’t always right, it just likes to highlight things around you. Meditation is a simple practice that can help you separate “you” from the voice in your head. Nothing mystical, just breathe and watch what your mind does. It will eventually get quieter.

6.4. Perceptual Control

6.4.1. Perceptual Control Theory is a theory of human behavior that says we act to keep our perception of the world within acceptable boundaries. For example, we wear a coat not because of the weather, but because we’ll feel cold and we don’t want to feel cold. Once a certain action brings the perception under control, the system stops acting until the system is once again out of control. The Environment dictates which actions are possible to bring the perception under control. Control is not about planning, it’s about adjusting to environmental changes as they happen. By understanding that people act to control their perceptions, you’ll be better equipped to influence them.

6.5. Reference Level

6.5.1. The key element of every Perceptual Control System is its Reference Level: a range of perceptions that indicate the system is “under control.” There are three kinds of Reference Levels: Setpoint. A minimum or maximum level. Business finances are handled this way: as long as your revenue and expenses are over and below the respective limits, you’re ok. Range. A spread of acceptable values. The difference with a set point is that there’s an upper and a lower limit, and the perception must be in between those limits to be under control. Error. Set point defined as zero: anything that’s not zero is out of control. The pain receptors in your skin, or customer service complaints are good examples of this. To change behavior, you must either change the Reference Levels or the Environment. By changing the reference level or changing the available options, you can act in a different way and still be under control, even if the perceptions are the same. Change the Reference Level and your behavior will change completely.

6.6. Conservation of Energy

6.6.1. Conservation of Energy means that we’ve evolved to avoid expending energy unless it’s necessary. Unless a Reference Level is violated, people will generally Conserve Energy by not acting. Sources of information that change your Reference Levels are valuable in prompting action. By learning of other choices that you can make, you may acquire different Reference Levels. All you need to know is that something that you want is possible, and you’ll find a way to get it.

6.7. Guiding Structure

6.7.1. Guiding Structure means the structure of your Environment is the largest determinant of your behavior. If you want to successfully change a behavior, change the structure that influences or supports the behavior first, and the behavior will follow. Don’t try to change your behavior directly, that requires a lot more willpower. It’s easier to focus on the Environment.

6.8. Reorganization

6.8.1. Reorganization is a random action that occurs when a Reference Level is violated, but you don’t know how to bring back under control. This is what happens when people feel “unhappy with their jobs”, or have the “quarter-life crisis.” There’s something wrong, but it’s hard to know what. Reorganization is the neurological basis of learning. If your mind doesn’t know what to do, the best thing is to do random things to acquire data. It’s best not to fight Reorganization. It usually just slows down your learning without improving your satisfaction. Once you learn how to bring the perception under control, Reorganization stops naturally. Respect your mind’s impulse to try something new.

6.9. Conflict

6.9.1. Conflict occurs when two control systems try to change the same perception. This is what happens in the typical case of procrastination: one system wants to rest, and one wants to work. Conflict also occurs when people are controlling for different outputs that require the same input. Conflicts can only be solved by changing Reference Levels: how success is defined by the parties involved. Change the structure of the situation that creates the reference levels each party is using to define success, and you’ll eliminate the conflict.

6.10. Pattern Matching

6.10.1. Our brains are Pattern Matching machines, constantly trying to find patterns and associating them with previous patterns. This happens unconsciously, your brain does it simply by paying attention to the world. Humans learn patterns primarily via Experimentation. Patterns get stored in our memory, waiting to be recalled. This process is optimized for speed to help you remember things quickly, not accurately. The more accurate patterns you’ve learned, the more options you have when solving a problem.

6.11. Mental Simulation

6.11.1. Mental Simulation is our mind’s ability to imagine taking a specific action and simulating the probable result before acting. Anticipating the results of our actions improves our ability to solve new problems. Mental Simulation relies on our memory, learned via perception and experience. Without supplying a goal, a destination, mental simulation can’t exist. Mental Simulation is extremely powerful if you learn how to harness it consciously.

6.12. Interpretation and Reinterpretation

6.12.1. When there’s not enough information to develop an accurate Pattern, the human brain relies on prior information and patterns to make Interpretations and fill the gaps. These snap Interpretations can be altered via Reinterpretations. You can change your beliefs and mental simulation consciously by recalling and reinterpreting past events. Reinterpretation is possible because our memory is impermanent. Every time we recall something, the new memory will include any changes we’ve made to it. Reinterpret your past and you’ll improve your ability to make great things happen.

6.13. Motivation

6.13.1. Motivation is an emotional state that links the parts of our brain that feel with the parts that are responsible for action. There are two basic desires that spark Motivation: moving towards something desirable, and moving away from something not desirable. Motivation is an emotion, not a logical activity. Just because your brain thinks you should be motivated, that doesn’t mean you’ll become motivated automatically. Conflicts result when there are “move towards” and “move away” signals at the same time. This defense mechanism was developed to avoid risks in the past, but most present risks are no longer life or death situations like they used to be. As long as there are also “move away” signals that create a Conflict, it’s hard to feel motivated to do something. Eliminate the inner conflicts that make you move away from potential threats, and you’ll find your motivation.

6.14. Inhibition

6.14.1. Inhibition is the ability to temporarily override our natural inclinations. Willpower is the fuel of Inhibition. Whenever we inhibit our natural responses to our environment, willpower is at work. Inhibiting certain decisions or responses can be beneficial, but our ability inhibit has limitations (see Willpower Depletion).

6.15. Willpower Depletion

6.15.1. Willpower is a way to interrupt our automatic processing in order to do something else. Our reserves of willpower are very limited, and become Depleted with use. The best way to use your limited resources of willpower is to use Guiding Structure to change your environment instead of your behavior. Focus on using your willpower to change your environment, and you’ll have more available when Inhibition is necessary.

6.16. Loss Aversion

6.16.1. Loss Aversion means that people hate to lose things more than they like to gain them. Loss Aversion explains why threats usually take overcome opportunities when it comes to Motivation. Loss Aversion also explains why uncertainty appears risky. For example, starting a business involves the potential loss of a steady and predictable income, which stops people from getting started in the first place. The best way to overcome loss aversion is to Reinterpret the risk of loss as “no big deal.” This is why Risk Reversal is so important when presenting an offer: people hate to lose. Eliminate this perception of risk by offering guarantees, and you’ll increase your sales.

6.17. Threat Lockdown

6.17.1. Threat Lockdown is a protective mode your mind and body enter to defend against an external threat. When your mind perceives a potential threat your body immediately prepares to respond. Your body will come out of protective mode only once you’re sure there’s no longer a threat. The subconscious choice to fight, flee or freeze depends on your brain’s Mental Simulation of the situation. Freezing makes your brain go into Threat Lockdown, hoping the threat will pass you by, and making it difficult to fixate on anything other than the threat. Threat Lockdown is a response designed to help you defend yourself, but it often malfunctions in today’s environment. Today’s threats are chronic, but less acute than in the past. If you’re experiencing Threat Lockdown, don’t try to repress it: it won’t go away, it’ll only make the threat signals stronger. The key to dealing with it is to convince your mind that the threat no longer exists, either by convincing your mind that there never was a threat, or by convincing it that the threat has passed.

6.18. Cognitive Scope Limitation

6.18.1. Cognitive Scope Limitation is the way the human mind tends to simplify reality when it becomes too overwhelming for the mind. This is what happens when you walk on Times Square: you can’t possibly feel emotionally connected to so many strangers. It’s not possible to expand the scope of information in our minds, we just can’t handle so much reality. Personalizing an issue is the best way to overcome this limitation. It helps to personalize decisions by imagining they affect someone close to us. What if your (present, distant, or metaphorical) grandchild evaluated the results of your decision? What if it appeared on the front page of the newspaper?

6.19. Association

6.19.1. The human mind stores information contextually. Because the brain looks for patterns, your mind effortlessly forms Associations, even between things that aren’t logically connected. Presenting positive associations in your offer can influence what people think about it. Cultivate the right associations and your customers will want what you have even more.

6.20. Absence Blindness

6.20.1. Absence Blindness Here’s a curious fact about human beings: we have a really hard time realizing that something isn’t there. When I worked in P&G’s Home Care division, one of my first projects was testing the viability of a product that essentially prevented things from getting dirty. You still had to clean, but it took more time for things to get dirty again. Once the product went into testing, it was apparent that the idea wasn’t feasible. The product genuinely saved people time and effort, but the user didn’t realize it - they had a hard time believing anything was actually happening, since they couldn’t see the product working. After the test phase was complete, the project was cancelled. Implications of Absence Blindness Great management is boring - and often unrewarding. The hallmark of an effective manager is anticipating likely issues and barriers and resolving them in advance so the team can make progress as quickly as possible. Some of the best managers in the world look like they’re not doing much, but everything gets done on time and under budget. The problem is, no one sees all of the bad things that the great manager stopped from happening. Less skilled managers are actually more likely to be rewarded, since everyone can see them “making things happen” and “moving heaven and earth” to resolve issues - even issues they themselves created via poor management. Prevention is under-appreciated. In the case of the product I was working on, people had a hard time believing something they couldn’t see working was actually efficacious. If you’re trying to sell the absence or prevention of something, you’re fighting an uphill battle, even if your product is great. Always state benefits in positive, immediate, concrete, and specific terms by focusing on things the user can directly experience. It’s uncomfortable to do nothing, even if doing nothing is the best course of action. Often, the best course of situation is to choose not to act, but it’s difficult for humans to accept that on an emotional level. The current economic crisis was essentially created by a lot of people in the financial sector doing stupid things, primarily due to government policies that made doing stupid things highly rewarding. The best course of action is for the government to stop continuing to reward bad behavior by ceasing the actions that created the issue, but that’s psychologically uncomfortable - after all, “we can’t sit here and do nothing while the world burns, can we?” As a result, people typically prefer the government to continue to act, even if the acting ultimately makes things worse. Overcoming Absence Blindness Absence blindness is an example of a cognitive bias, and the only semi-reliable way I’ve found to overcome it is checklisting. By thinking in advance what you want something to look like and translating that into visible reminders you can refer to while making decisions, checklists can help you remember to look for the absence of qualities in the moment. So make a note to remind yourself to handsomely reward the low-drama manager who quietly and effectively gets things done. It may not seem like their job is particularly difficult, but you’ll miss them when they’re gone.

6.21. Contrast

6.21.1. Humans are wired to notice Contrast, not to compare what we perceive with things that aren’t there (the root of Absence Blindness). We believe something is cheap when we compare it to something more expensive, but not necessarily if it stands on its own. Contrast is often used to influence buying decisions. In businesses, it’s often used as pricing camouflage. Take advantage of Contrast when presenting your offer and you’ll improve the way your customers view your offer.

6.22. Scarcity

6.22.1. Scarcity encourages people to act quickly. If people think they may lose the chance to acquire what you offer, they may take the risk. Loss Aversion ensures that the possibility of losing feels bad enough to prompt them to act now. Scarcity makes waiting feel like a loss. Here are a few ways to create Scarcity: Limited Quantities Price Increases in the near future Price Decreases that will end in the near future Deadlines Add an element of Scarcity to your offer, and you’ll encourage people to buy now instead of later.

6.23. Novelty

6.23.1. Novelty is the presence of new sensory data. Novelty is critical if you want to attract and maintain attention over a long period of time. Even the most Remarkable object gets boring over time. Human attention needs novelty to sustain itself. Continue offering something new, and people will keep paying attention.

7. Working With Yourself

7.1. Akrasia

7.1.1. Akrasia (pronounced “ah-KRAH-see-ah”) is the experience of realizing an action would be in your best interest... but you don’t do it. There are seven primary causes of akrasia: You can’t define what you want. You feel the task will bring you closer to something you don’t want. You can’t figure out how you’re going to get from where you are right now to where you want to be. You idealize the desired End Result to the point your mind estimates a low probability of achievement, resulting in Loss Aversion. The “should” was established by someone else, not you, prompting Persuasion Resistance. A competing action in the current Environment promises immediate gratification, while the reward of the task in question will come much later. The benefits of the action are abstract and distant, while other possible actions will provide concrete and immediate benefits. Akrasia is one of the primary barriers to getting things done, and it’s tricky to resolve.

7.2. Monoidealism

7.2.1. Monoidealism is the state of focusing your energy and attention only on one thing. It’s often called a “flow” state: clear, focused attention on one subject for a long period of time. Here’s how to induce a Monoideal state: Eliminate potential distractions and interruptions. Eliminate inner conflicts. Kick-start the attention process by doing a “dash” of productive work to get into the flow quickly. You can stop after that dash, but chances are you’ll keep going. If you eliminate distractions and conflicts before you start your dash, you’ll quickly transition into a Monideal state.

7.3. Cognitive Switching Penalty

7.3.1. Every time you switch your attention from one subject to another, you incur the Cognitive Switching Penalty. Your brain spends time and energy thrashing, loading and reloading contexts. Neurologically, multitasking is impossible. You are not really doing two things, you’re switching your attention from one thing to the other. Productive multitasking is a myth. To avoid unproductive switching, it’s best to group similar tasks together. That way your brain needs to load the context into working memory only once. You’ll get more done with less effort.

7.4. Four Methods of Completion

7.4.1. There are only four ways to “do” something: Completion, Deletion, Delegation and Deferment. These are called the 4 Methods of Completion. You can use all four options when going through your to-do list and you’ll get more done. Completion: Doing the task. It’s best for tasks that only you can do particularly well. Deletion: Eliminating the task. It’s effective for anything that’s unimportant or unnecessary. Delegation: Assigning the task to someone else. It’s effective for anything that other person can do 80% as well as you. Deferment: Putting the task off until later. It’s effective for tasks that aren’t critical or time-dependent.

7.5. Most Important Tasks

7.5.1. A Most Important Task (MIT) is a critical task that will create the most important results for your goals. Not everything is equally important. Take some time to identify which tasks are critical at the moment. Every day, create a list of two or three MITs, and focus on getting them done as soon as possible. Keep this list separate from your general to-do list. Having a short list of MITs helps you maintain a Monoideal state by letting you say no to interruptions that aren’t important. By definition, everything that’s not an MIT is not critically important. By achieving your MITs quickly, you’ll have the rest of the day to handle anything else that comes up.

7.6. Goals

7.6.1. A Goal is a statement that describes precisely what you want to achieve. Goals are more useful if they are Framed in a Positive, Immediate, Concrete and Specific (PICS) format: Positive: your goal should be something you move toward, not away from. Immediate: your goals should be something that you decide to make progress on now, not “someday.” Concrete: it means that you’re able to see results in the real world. Achieve “happiness” is not a concrete goal. Specific: you have to define what, when and where you are going to achieve your goal. Your goals should be under your control, like “20 minutes of exercise” instead of “lose 20 pounds.” It’s ok to change your goals if you no longer feel good about them.

7.7. States of Being

7.7.1. A State of Being is a quality of your present experience. States of Being are qualities, not Goals. “Being happy” is not an achievement, is a state. Breaking down States of Being into smaller parts helps decide what some imprecise states actually mean to you. Decide what States of Being you want to experience, and you’ll have a powerful decision criteria that you can use to evaluate your actions.

7.8. Habits

7.8.1. Habits are regular actions that support us. Due to the power of Accumulation, habits can add up to huge results over time. Habits require Willpower to create. It’s better to use Guiding Structure to help install the habits you want to adopt. Habits are easier to install if you use triggers. For example, make a note to take your vitamins every time you wash your teeth. Focus on installing one habit at a time until it feels automatic and you can move to the next one. Remember that your Willpower is limited.

7.9. Priming

7.9.1. Priming is a method of consciously programming your brain to alert you when particular information is present in your environment. You can use Priming to influence your Pattern Matching. By deciding what you’re looking for, you can program your mind to alert when valuable information pops up. Goal setting is useful because it’s an easy way to Prime your mind to look for things that will help you achieve your goal.

7.10. Decision

7.10.1. A Decision is the act of committing to a specific plan of action. If you’re not cutting off viable options, you are not making a decision. No Decision is ever made with complete information. Lack of information shouldn’t prevent your from deciding, the world is too complex to make accurate predictions. Failure to make a Decision is itself a Decision. Life doesn’t stop if you refuse to choose. For best results, be clear and conscious when making a decision.

7.11. Five-Fold Why

7.11.1. The Five-Fold Why is a technique to help you find out what you actually want. Applying it is easy: whenever you want something, ask yourself “Why?” as many times as needed until you get to the root of the want. Discover the root causes behind the want, and you’ll discover new ways to get there.

7.12. Five-Fold How

7.12.1. The Five-Fold How is a way to connect your core desires to physical actions. Once that you know what you want, ask yourself: “how would you go after it?” Continue asking “How?” until you’ve defined your plan in terms of Next Actions. If you do it right, each action will give you an experience of what you want as you do it. Connect big goals to small actions, and you’ll inevitably accomplish what you want.

7.13. Next Action

7.13.1. A Next Action is the next specific, concrete thing you can do now to move a project forward. You don’t have to know everything to move forward, just the next step. To keep yourself from feeling overwhelmed, track your projects and tasks separately. Focus on completing the Next Action, and you’ll eventually complete the entire project.

7.14. Externalization

7.14.1. Externalization is the process of transforming our thoughts into some sort of external form, typically by writing or speaking. We respond better to stimuli in our Environment than our own internal thoughts. We can improve our productivity by converting our internal thoughts into an external form. Externalization lets us re-input information into our brains via a different channel, which translates into additional cognitive resources. There are two primary ways to externalize your thoughts: Writing. This is the best way to capture ideas, plans and tasks. Speaking. Talking with friends, colleagues, and mentors. Don’t keep your thoughts locked up in your head. The more you Externalize, the clearer your thoughts will become, and the faster you’ll reach your goals.

7.15. Self-Elicitation

7.15.1. Self-Elicitation is the process of asking yourself questions, and then answering them. By recording your answers in a journal, logging when specific behaviors occur and noting the frequency of these behaviors, you’ll discover patterns. If you know the pattern, it’s easier to change the behavior. Make it a Habit to consistently ask yourself good questions, and you’ll overcome your challenges easier.

7.16. Counterfactual Simulation

7.16.1. Counterfactual Simulation is applied imagination: consciously asking a “what if” question, and letting your mind imagine the rest. Based on the stored Patterns, Associations and Interpretations, your brain will produce what it believes is the most likely scenario. Counterfactuals are very useful because of their flexibility: you can simulate anything you want. When you use Counterfactual Simulation, you assume the event or state you’re simulating is already true. The mind then fills the gaps between A (where you are) and B (where you want to be).

7.17. Parkinson’s Law

7.17.1. Parkinson’s Law is usually expressed as “Work expands so as to fill the time available for its completion.” If something must be done in a year, it’ll be done in a year. If it must be done in six months, then it will. Parkinson’s Law should not be used to set unreasonable deadlines. Parkinson’s Law is best used as a Counterfactual Simulation question. What would it look like to finish a project on a very short period of time?

7.18. Doomsday Scenario

7.18.1. A Doomsday Scenario is a Counterfactual Simulation where you ask the question: “what’s the worst that could happen?” Doomsday Scenarios are intentionally pessimistic to make you realize that in most cases, you’ll be okay even if things go wrong. Remember: most threats nowadays are no longer life-or-death situations. By Externalizing your worst fears, you realize what they really are: irrational overreactions. Once you’ve imagined the Doomsday Scenario, you can work to improve upon the worst case.

7.19. Excessive Self-Regard Tendency

7.19.1. Excessive Self-Regard Tendency is the natural tendency to overestimate your own abilities. Excessive Self-Regard Tendency is more pronounced if you don’t know much about the subject at hand. The more incompetent people are, the less they realize they are incompetent. On the contrary, the more you know about a subject, the more accurate your perception of your competence will be. Once you learn more, you become “consciously incompetent”: you know what you don’t know. Developing “conscious competence”, knowing what you’re doing, takes experience, knowledge and practice. A healthy amount of humility can keep you from assuming you know everything, and therefore making you want to keep learning. Excessive Self-Regard Tendency is common, don’t think you’re immune to it. It helps to cultivate relationships with people who aren’t afraid to tell you when you’re wrong.

7.20. Confirmation Bias

7.20.1. Confirmation Bias is the tendency for people to look for information that supports their conclusions, and ignore information that might prove them wrong. The stronger the opinion, the more we ignore sources that challenge it. The way to counter Confirmation Bias is to actively look for information that challenges your hypothesis. Looking for disconfirming information is uncomfortable, but useful.

7.21. Hindsight Bias

7.21.1. Hindsight Bias is the tendency to kick yourself for things “you should have known.” Every decision you’ll ever make will be lacking some information. That’s why we use Interpretation to fill in the blanks. It’s important to realize that the feeling of “feeling stupid” for not predicting an outcome is irrational, and that there’s nothing you can do to go back and change it. Hindsight Bias becomes destructive if you judge yourself or other for not knowing the unknowable. Reinterpret your past mistakes in a positive way, focus on what’s ahead.

7.22. Performance Load

7.22.1. Performance Load is what happens when you have too many things to do. Above a certain point, the performance in all those tasks decreases. You must set limits to be productive. Limits have consequences. You need to be ready to accept their consequences, otherwise you are not setting any limits. Have unscheduled time to handle the unexpected. If your agenda is always full for not using limits, you won’t be able to handle surprises that might come your way.

7.23. Energy Cycles

7.23.1. Your body has Energy Cycles: natural rhythms of energy during the day. Hacking your Energy Cycles (e.g.: not resting) can sound tempting but it’s ultimately unproductive. Here are four ways to work with your body and not against it: Learn your patterns: keep a track of your energy during different parts of the day, and you’ll eventually see which are the best moments for you to work and rest. Maximize your peak cycles: plan your day in order to take advantage of the moments where you have the most energy. Take a break: When you’re in a down cycle, it’s better to rest than power through. Rest is not optional. Get enough sleep: Sleep deprivation results in a prolonged cycle, lowering your productivity. Paying attention to your Energy Cycles and working accordingly, will help you get the most out of your time available.

7.24. Stress and Recovery

7.24.1. It’s helpful to learn your breaking point: know how much you’re capable of doing before burning out. Paying attention to Stress and Recovery is the how you make sure that you don’t have more on your plate that you can’t handle. It’s impossible to know how much you can do until you push your limits. The knowledge you’ll gain will help make better decisions about which projects say yes and no to. You are not a machine: you can’t always operate at 100%. Dedicating time to relax and recovery will make your life more enjoyable and productive.

7.25. Testing

7.25.1. Testing is the act of trying something new, a way of applying the Iteration Cycle to your own life. You can’t make positive changes unless you try something new. Here’s a simple structure to help you experiment: Observations: what do you see that you want to improve? Knowns: what do you know that is related to your observations? Hypotheses: what might cause to contribute to your observations? Tests: which hypotheses will you try? Results: what happened after each test? Did it improve your observation? Testing is the best way to ensure that your life gets better over time. Over the time you discover Patterns, and you become better at knowing what makes your life better or worse.

7.26. Mystique

7.26.1. Mystique is powerful: it makes things with a little mystery appear more attractive than what they really are. It’s easy to like the idea of doing something. It’s different to like actually doing it. The best way to counteract Mystique is to talk to someone who does what you are interested in. Ask them and learn the high and low points of their job. No situation is perfect. Learn from others before you start, it will help greatly to make a better decision.

7.27. Hedonic Treadmill

7.27.1. The Hedonic Treadmill explains why people who achieve wealth, status, and fame continue to seek more. We pursue pleasurable things because we think they’ll make us happy. When we finally achieve or acquire what we’re seeking, we adapt to our success in a very short period of time, and our success no longer gives us pleasure. As a result, we begin seeking something new, and the cycle repeats. Here’s how to short-circuit the cycle: Work to make “enough” money. Focus on health and energy. Spend time with people you enjoy. Remove chronic annoyances. Pursue a new challenge.

7.28. Comparison Fallacy

7.28.1. The Comparison Fallacy assumes that it’s possible to compare your skills, priorities, goals, and results with other people in an accurate and useful manner. Other people are not you, and you are not other people. You have unique skills, goals, and priorities. In the end, comparing yourself to other people is silly, and there’s little to be gained by it. The only metric of success that matters is this: are you spending your time doing work you like, with people you enjoy, in a way that keeps you financially Sufficient?

7.29. Locus of Control

7.29.1. Trying to control everything that happens to you is a recipe for disaster and frustration, and a waste of time and energy. Understanding your Locus of Control helps you separate what you can control from what you can’t. Focus on your efforts instead of results that you can’t control. Focus your energy on what you can influence, and let everything else go.

7.30. Attachment

7.30.1. Attachment means becoming emotionally invested in a certain result, status, environment, or idea. The more attached you are to something, the more you limit your flexibility and reduce your chances of finding a better way. Twists in life are bound to happen. It’s smart to live to fight another day. Acceptance means applying the concept of Sunk Costs to yourself. The way to deal with Attachment is to accept that your idea is no longer feasible. Accept what happened and focus on ways to make it better.

7.31. Personal Research and Development

7.31.1. A Personal R&D budget can provide you with guilt-free spending on anything that will improve your skills and capabilities. R&D exists because it works. Investing in your personal skills and capabilities can enrich your life and open possibilities to additional income sources. What would it look like if you set aside a small percentage of your income as a Personal R&D budget?

7.32. Limiting Belief

7.32.1. Limiting Beliefs are mistaken assumptions or worldviews that can act as barriers to achieving a Goal or maintaining a Habit or State of Being. There are two ways of looking at the world: Your skills and abilities are fixed. Your skills and abilities are malleable. If you keep working on something, you’ll eventually get better. The Growth Mindset means that you’ll keep going if you encounter a difficulty, because you are always getting better. The way you respond to challenges determines how successful you’ll be. There are no “fundamental defects.” View your mind as a muscle and help it grow.

8. Working With Others

8.1. Power

8.1.1. All human relationships are based on Power and usually take one of two forms: Influence, the ability to encourage someone to do what you suggest. Compulsion, the ability to force someone to do what you command. Influence is much more effective than Compulsion. Power represents your ability to get things done through other people. The more power you have, the more things you can do. But remember: with great power comes great responsibility. There’s nothing morally wrong with wanting more Power. The reason that interactions between many people become political is the ever-present nature of Power. If you don’t have a plan, someone will have one for you. The most direct way to increase your power is to increase your Influence and Reputation.

8.2. Comparative Advantage

8.2.1. Comparative Advantage means it’s better to capitalize on your strengths than to shore up your weaknesses. Businesses work better if the individuals focus on what they’re best, and work with other specialists. Comparative Advantage is the reason why diverse teams outperform homogeneous teams. Self-reliance improves your flexibility and knowledge, but it’s harmful taken to the extreme. Work with others to get more done, faster and better. The benefit of self-education is being able to see good talent in others. By learning a little about their field, you understand if they are good or not.

8.3. Communication Overhead

8.3.1. Communication Overhead is the proportion of time you spend communicating with your team instead of getting productive work done. Communication is absolutely necessary, but as the size of your team increases, so does Communication Overhead. The solution is simple but not easy: make your team as small as possible. This will save everyone’s time and increase productivity.

8.4. Importance

8.4.1. Everyone wants to feel Important. The more important you make people feel, the more they’ll value their relationship with you. The more interest you show in other people, the more important they’ll feel. Making someone feel important is not difficult, yet is rare in today’s world: pay attention, listen intently, express interest and ask questions.

8.5. Safety

8.5.1. Effective communication only occurs when both parties feel Safe. As soon as one party feels threatened in some way, they will withdraw mentally and emotionally from the conversation. People need to feel safe to express what they think and what’s important to them. The STATE model to communicate without anger or defensiveness: Share your facts. Facts are less controversial, so lead with them. Tell your story. Explain your point of view, without judging or insulting. Ask for others’ paths. Listen to their side of the story. Talk tentatively. Avoid judgments and ultimatums. Encourage testing. Make suggestions and ask for input until you agree on a course of action. People have different attitudes. By knowing how to tailor your words and actions to the other party’s personality, you’ll get closer to an effective communication.

8.6. Golden Trifecta

8.6.1. The Golden Trifecta is my way to make others feel important and safe when talking to me: Appreciation, Courtesy and Respect. Appreciation means expressing your gratitude for what others are doing for you, even if it’s not perfect. Courtesy is, simply put, politeness. Respect means honoring the other person’s status. It’s important to apply The Golden Trifecta to all your interactions with people, not just the ones you’re interested in.

8.7. Reason Why

8.7.1. Research shows that giving a Reason Why for your request increases dramatically people’s compliance rate. Humans are predisposed to look for behavioral causes. People will be more receptive if you give them a Reason Why. Any reason will do.

8.8. Commander’s Intent

8.8.1. Commander’s Intent means explaining why something must be done when assigning a task to someone. The more your agent understands the purpose behind what must be done, the better he/she will do it. Commander’s Intent alleviates Communication Overhead. By being clear about the purpose behind a plan, others can act toward that goal without the need of constant communication.

8.9. Bystander Apathy

8.9.1. Bystander Apathy is an inverse relationship between the number of people who could take action and the number of people who actually choose to act. Bystander Apathy explains why groups like committees never get anything done: everyone assumes someone else will step up. The best way to eliminate Bystander Apathy in project management is to have clearly defined tasks for each individual.

8.10. Planning Fallacy

8.10.1. The Planning Fallacy is the tendency for people to underestimate completion times on complex projects. When planning, we imagine a scenario where everything goes well, and we underestimate the likelihood of things that could impact the plan. It’s appropriate to include a few months of Slack time to make the plan more accurate. Slack time is rarely seen as a positive thing, but it helps to include it into the planning to be ready for unexpected events. The inaccuracy of a plan doesn’t make it worthless. Its value doesn’t lie in its prediction, but in helping understand requirements, dependencies and risks. Use plans, but don’t depend on them.

8.11. Referrals

8.11.1. Referrals are trusted recommendations that make it easier for people to choose to work with someone they don’t know. Referrals work because they transfer the qualities of being known and liked. The more people who know, like, and trust you, the more Referrals you’ll get, and the better off you will be.

8.12. Clanning

8.12.1. Clanning is the process through which humans naturally tend to form distinct groups. Identifying ourselves as part of a group is a human instinct. Groups naturally form around important issues, positions or events. Understand the group dynamic, or you’ll be caught up in it.

8.13. Convergence and Divergence

8.13.1. Convergence is the tendency of group members to become more alike over time. This is what’s known in business terms as “company’s culture.” Convergence also means that groups tend to police themselves. Divergence is the tendency of group members to become less like other group members over time. Convergence is useful if you consciously choose to spend time with people you’d like to become more like. At the same time, breaking away from groups that aren’t serving you is painful but necessary to grow. If your social circle isn’t supporting your goals, change your social circle.

8.14. Social Signals

8.14.1. Social Signals are tangible indicators of some intangible quality that increases a person’s social status or group affiliation. People spend huge amounts of energy and money to send social signals (a Rolex, or a sports team t-shirt and make-up, for example). Social Signals have real Economic Value, so build them into your offer if you can. To build offers with signaling value, you need to understand what people want to signal to others. Connect your offer to one of the Core Human Drives, and people will want what you have.

8.15. Social Proof

8.15.1. Social Proof is the process through which the actions of other individuals tell us that it’s ok to behave in a certain way. When a situation is ambiguous, we learn by watching the behavior of others. Testimonials are an effective form of Social Proof to increase sales. The most effective testimonials are the ones that mirror the feelings of your prospects. Add Social Proof to your offers to increase your sales.

8.16. Authority

8.16.1. People tend to comply with Authority figures. This occurs even if they wouldn’t take the same action under different circumstances. Once a figure is perceived as an Authority, they become more persuasive. If you’re in a position with Authority, people will interact with you differently. People may filter what they tell you in order to tell you what you want to hear, which may not be what you need to hear. Developing a strong Reputation will give you the benefits of Authority. Establish yourself as an Authority and you are more likely to increase your sales.

8.17. Commitment and Consistency

8.17.1. Commitments are a way of binding people together. Breaking a promise can have a negative impact on someone’s Reputation, so people usually try to maintain Consistency with their previous positions and promises. Obtain a small commitment, and you’ll get more compliance from your customers.

8.18. Incentive-Caused Bias

8.18.1. Incentive-Caused Bias says that people with a vested interest in something will tend to guide you in the direction of their interest. Incentives influence the way people act. Change the incentive, and you’ll change the behavior. Incentives are tricky because they interact with our Perceptual Control systems. Incentives can be useful if used properly, but caution is in order. Make sure that your interests match those of the people that receive the incentive.

8.19. Modal Bias

8.19.1. Modal Bias is the automatic assumption that our idea is always best. The best way to avoid Model Bias is to use Inhibition to temporarily suspend judgment, at least long enough to consider other perspectives and suggestions. Model Bias is automatic, so we need to use Willpower and Inhibition to overcome it. Deliberately keeping an open mind will improve your decision making.

8.20. Pygmalion Effect

8.20.1. The Pygmalion Effect explains that people tend to perform up to the level that others expect of them. This effect explains why our relationships are usually self-fulfilling prophecies. Once you set expectations for somebody, that person will tend to live up to that expectation, whether it’s good or bad. The Pygmalion Effect doesn’t justify having unrealistic expectations of other people. Expecting miracles is a recipe for frustration on both ends. The paradox of the Pygmalion Effect is that having high expectations of people will produce better results, but it’s also more likely you’ll be disappointed. If you’re assessing someone, remember to judge as objectively as possible.

8.21. Attribution Error

8.21.1. Attribution Error means that when others screw up, we blame it on them, but when we screw up, we blame the situation and circumstances. Avoiding the Attribution Error helps keeping things in good terms with people you work with. When something isn’t working, find out more about the situation before blaming the person. Unless a particular behavior becomes a Pattern, it helps to analyze the situation to see where did the problem come from.

8.22. Option Orientation

8.22.1. When something goes wrong, what matters the most is how you handle the problem. Fixating on the issue doesn’t help. It’s far more productive to focus on options, not issues – that’s Option Orientation. By focusing your energy on potential options to solve the problem, you’re more likely to find a way to make things better.

8.23. Management

8.23.1. Management is the act of coordinating a group of people to achieve a specific goal while accounting for any Change or Uncertainty. These are the six simple principles of Management: Recruit the smallest group of people that can do the job quickly and effectively. Communicate clearly the End Result, who is responsible for what, and the current status. Treat people with respect. Use The Golden Trifecta consistently. Create a productive Environment, and then let people do their work. Have an aggressive plan to complete the project, but don’t have unrealistic expectations regarding certainty and prediction. Measure what you’re doing to see if it’s working, and make the necessary adjustments and Experimentations. Do these well, and your team will be very productive.

8.24. Performance-Based Hiring

8.24.1. Hiring is a tricky business, and there’s no foolproof method to find, attract, and retain star employees and contractors. Performance-Based Hiring is a method of ensuring the people you hire are fit for the job before you hire them. Mistakes in hiring are almost always expensive, and a bad hire can cost you precious time and money, and your team’s limited energy and patience. The “golden rule” of hiring: the best predictor of future behavior is past performance. If you look for past performance and evaluate a candidate’s work first-hand, you’ll make much better hires. Here’s a simple, effective hiring process: Publicize you’re looking for help. Use a basic “acid test” for skill. Ask candidates to show you past projects they’re proud of. Check references. “Would you work with the candidate again?” Give promising candidates a short-turnaround project or consulting engagement.

9. Understanding Systems

9.1. Gall’s Law

9.1.1. Gall’s Law states that all complex systems that work evolved from simpler systems that worked. If you want to build a complex system that works, build a simpler system first, and then improve it over time. Gall’s Law is why Prototypes and Iteration work so well when creating value. Creating a complex system from scratch is sure to end in failure.

9.2. Flow

9.2.1. Every system has Flows: movements of resources in and out of the system. Inflows are resources moving into the system, like water into a sink. Outflows are resources moving out of the system, like money out of a bank account. Understand the Flows to understand the system.

9.3. Stock

9.3.1. A Stock, in the systems sense, is a pool of resources. By following the Flow, you’ll find where resources pool together. To increase the stock, increase the Inflows and decrease the Outflows. If you want to decrease the stock, do the opposite. Find the Stock, and you’ll find resources waiting to be used.

9.4. Slack

9.4.1. Slack is the amount of resources present in a Stock. For a system to operate efficiently, the Slack should be just right: not too big, not too small. Slack is tricky: too much and you’re wasting money, too little and you face the risk of running out of Stock.

9.5. Constraint

9.5.1. A system’s performance is limited by the availability of critical input. Eliminate the Constraint and performance will improve. These are Goldratt’s five steps to alleviate a Constraint: Identification: find the limiting factor. Exploitation: make sure that the resources related to the Constraint aren’t wasted. Subordination: redesign the system to support the Constraint. Elevation: permanently increase the capacity of the Constraint. Re-evalution: after making a change, reevaluate a system to see where’s the Constraint. The more quickly you move through these steps, the more your system’s Throughput will improve.

9.6. Feedback Loop

9.6.1. A Feedback Loop exists in a system when an output becomes the input in the next cycle. Balancing Loops dampen system’s outputs with each cycle. Think of a tennis ball, and how it loses height with each bounce until it stays still. Reinforcing Loops amplify the system’s output with each cycle. Think of interest payments: each cycle makes the next payment even bigger, resulting in more interest, over and over again. There are Feedback Loops everywhere, and it’s critical to notice them to appreciate a system’s complexity.

9.7. Autocatalysis

9.7.1. Autocatalysis is a reaction whose output produces the raw materials necessary for an identical reaction. An autocatalyzing system will produce the inputs needed for the next cycle as a by-product of the previous cycle. This results in a positive, self-reinforcing Feedback Loop, where the system will grow until the system changes and produces less output. Example: money spend in direct marketing that brings in more revenue, which the company spends on more more direct marketing, which brings in even more revenue. If your system has an autocatalyzing element, it’ll grow more quickly.

9.8. Environment

9.8.1. An Environment is the structure in which a system operates. When the Environment changes, the system must do it too to keep continue operating. Always consider the Environment and adapt your system to it.

9.9. Selection Test

9.9.1. A Selection Test is an environmental constraint that determines which systems self-perpetuate and which ones don’t. It’s like breathing air for a system: if a business doesn’t bring enough revenue, it ‘dies’. If the Environment changes, the Selection Tests change as well. If you can identify Selection Tests in a market, you’ll be able to compete there more effectively. Ignore Selection Tests at your own peril.

9.10. Uncertainty

9.10.1. The difference between Uncertainty and Risk is that Risks are known unknowns: you know what might happen. Uncertainties are unknown unknowns, there’s no way to expect that that could happen. You can’t know if a something unexpected will occur, all you can do is remain flexible, prepared and Resilient to react properly. Accepting Uncertainty is accepting the real world, instead of coming up with a nicer one that doesn’t exist. Don’t rely on making predictions. Plan for flexibility instead.

9.11. Change

9.11.1. All systems Change. Complex systems are in constant state of flux. It’s hard to know how a system will change, but it’s certain that it will. Reaching a point with your business where everything is perfect and unchanging is impossible. The more flexible you are, the better prepared you’ll be when Change comes.

9.12. Interdependence

9.13. Counterparty Risk

9.13.1. Counterparty Risk is the possibility that other people won’t deliver what they have promised. The more your system depends on other people, the higher the risk of failing. If your system relies on the performance of other people, you need to prepare for the possibility that they won’t reach your expectations.

9.14. Second-Order Effects

9.14.1. Every action has a consequence, and each consequence has another consequence. These are called Second-Order Effects. Every change you make to a system will have Second-Order Effects, which may affect the system’s functionality. Be careful when making changes, they may have the opposite effect of what you aimed for.

9.15. Normal Accidents

9.15.1. The theory of Normal Accidents is best expressed as a universal proverb: “shit happens.” The more complex a system is, the higher the probability of something eventually going wrong. Overreacting to Normal Accidents is counterproductive: if you want the system to fail less, making it more complex doesn’t help. The best way to avoid Normal Accidents is to analyze breakdowns when they happen to learn about them and create contingency plans in case they happen again in the future. Normal Accidents are the reason you should keep your systems as loose as possibly (without affecting its performance). Accidents will happen, it’s just a matter of time.

10. Analyzing Systems

10.1. Deconstruction

10.1.1. Deconstruction is the process of separating complex systems into the smallest subsystems possible to help understand it. Once you’ve identified the subsystems, you can isolate them to see how they work and what part they play in the big system and build your understanding from the ground up. Don’t lose sight of Interdependence. Remember that each subsystem is a part of a bigger system. Creating diagrams and flowcharts can help you understand how it all comes together. It’s important to consider the present conditions in a system and how it affects each subsystem.

10.2. Measurement

10.2.1. Measurement is the process of collecting data as the system operates. Measurement also makes it possible to compare systems with one another. The best way to avoid Absence Blindness is to measure to identify potential issues that you might not be seeing. The first step to improving a system is collecting data, and you do that with Measurement.

10.3. Key Performance Indicator

10.3.1. Not all Measurements are equally important. Measurements of the critical parts of a system are called Key Performance Indicators (KPIs). These are a few questions, related to the Five Core Business Processes you can use to identify the KPIs: How quickly is the system creating value? What is the level of inflows? How many people are paying attention to your offer? How many prospects do you have? How many prospects are becoming paying customers? How quickly can you serve each customer? What is your complaints rate? What is your profit margin? How much purchasing power do you have? Try to limit yourself to three to five KPIs. If you overload yourself with data, you won’t be able to make significant changes. Focus on your KPIs to improve your system with the critical data.

10.4. Garbage In, Garbage Out

10.4.1. The quality of the input you use always has an impact on the quality of the output. If you build an object from poor quality materials, that object will be unattractive and unreliable. If you analyze poor quality data, the resulting analysis will be worthless at best, and at worst misleading or damaging. If you eat a lot of junk food and don’t move around much, you’ll feel apathetic instead of energetic. If the people working on a project aren’t skilled or excited, the end result will inevitably suffer. The solution is straightforward: if you don’t want garbage when you’re done, don’t use garbage when you begin. To improve your results, improve the quality of what you start with.

10.5. Tolerance

10.5.1. A Tolerance is an acceptable level of “normal” error in a system. Within a given range of measurements, the system is performing as intended. As long as the errors don’t exceed a certain threshold, urgent intervention is not required. Tolerances are often referred to as being “tight” or “loose.” The reliability of a system is often measured in terms of a percentage. Tight tolerances are very useful, and are a positive indicator of quality: after all, you don’t want mistakes or variations.

10.6. Analytical Honesty

10.6.1. Analytical Honesty means measuring and analyzing your data dispassionately. The best way to maintain Analytical Honesty is to have your measurements evaluated by someone who isn’t invested in your system. Don’t lie to yourself when it comes to your data: be honest and focus on improving the system instead.

10.7. Context

10.7.1. Context is the use of related measurements to provide additional useful information about the data you’re examining. Aggregate measures are worthless by themselves. How much is $1000 of revenue? It depends on your Context. Don’t focus on “magic numbers” when tracking your results. No measures matter in isolation, look at them in context with other measurements.

10.8. Sampling

10.8.1. Sampling is the process of taking a small percentage of the total output and using it as a proxy for the entire system. Sampling can help you identify systemic errors quickly. Sampling is good for quick tests of quality without incurring huge costs. Always make sure to test a random and uniform sample.

10.9. Margin of Error

10.9.1. Margin of Error is an estimate of how much you can trust your conclusions from a given set of observed Samples. The more samples you take, the higher the probability of your Confidence Interval. Small sample sizes can lead to misleading measurements. Always collect the largest samples you can to ensure better results.

10.10. Ratio

10.10.1. Calculating a Ratio is a method of comparing two measurements against each other. Divide your results by your input and you can get many useful relationships in your system. Tracking Ratios is a great way to see how the system is changing and what direction is taking. After running an analysis, it helps to construct Ratios in a creative way to see the most important parts of your system.

10.11. Typicality

10.11.1. It’s often useful to calculate or estimate a ”Typical″ value for a certain measurement: A Mean (or “average”) is calculated by adding the quantities of all data points, then dividing by the total number of data points available. They are simple to calculate, but are prone to having outliers that that skew the average too high or low to be representative. A Median is calculated by sorting the values from high to low, then finding the quantity of the data point in the middle of the range. By definition, 50% of the values will be below the Median. Comparing the Median to the Mean can tell you if the average is influenced by outliers. A Mode is the value that occurs most frequently in the set. They are useful for finding clusters of data. A Midrange is the value halfway between the highest and lowest data points. These are all tools that can help your system analysis if you use them right, but they can be misleading if you use the wrong tool for the situation.

10.12. Correlation and Causation

10.12.1. Causation is a complete chain of cause and effect. Correlation means that the given measurements tend to be associated with each other. Correlation is not Causation. Just because one measurement is associated with another, doesn’t mean it was caused by it. The more changes in a system, the harder it is to establish a Causation. The more you can isolate the change you make, the more you can tell if it really was the reason behind the results.

10.13. Norms

10.13.1. Norms are measures that use historical data to provide Context for current measurements. They are a way of learning from the past to avoid previous mistakes. When measurement practices change, Norms based on the previous measurements are no longer valid. Change the measurement methods, and you invalidate any Norms based on them. Past performance is no guarantee of future performance. Examine your Norms to make sure they are valid.

10.14. Proxy

10.14.1. A Proxy measures one quantity by measuring something else. Think of votes: they measure the “will of the people”, although measuring it with 100% accuracy is impossible. The closer the Proxy to the related subject, the more accurate. Proxies can help measure the immeasurable, but you have to make sure that the Proxy is highly Correlated with the subject of interest.

10.16. Humanization

10.16.1. Humanization is the process of using data to tell a story (Narrative) about a real person’s experience or behavior. Numbers only tell part of the story, you need to reframe the measures into actual behavior to really understand what happens. Developing fictional profiles of people developed from data (called “personas”) is a great way to Humanize. Just data doesn’t mean a lot. Tell a story to help people understand the issues.

11. Improving Systems

11.1. Intervention Bias

11.1.1. Before making a change to a system, it’s important to understand that human beings are predisposed to do something rather than nothing. Intervention Bias makes us likely to introduce changes that aren’t necessary in order to feel in control of a situation. The best way to correct for Intervention Bias is to examine what scientists call a null hypothesis: examining what would happen if you did nothing, or assumed the situation was an accident or error. Before making system changes, ask yourself: “do we need to do this at all?”

11.2. Optimization

11.2.1. Optimization is the process of maximizing the output or minimizing the input of a system. Maximization focuses on the system’s Throughput. Changing the system so it increases its Throughput means it’s performing better. Minimization focuses on the system’s inputs. For example, by minimizing your costs, you will increase your Profit Margin. You can’t Optimize multiple variables of a system at once. Focus your efforts on one until you understand how the changes you make will affect the system.

11.3. Refactoring

11.3.1. Refactoring means changing a system to improve its efficiency without changing its output. Improving output is not the goal of Refactoring. It’s making the system faster and more efficient. Refactoring starts by Deconstructing a system, and then looking for Patterns. Once Patterns emerge, you can rearrange the system by grouping similar processes and inputs together. Refactoring is critical to improve the functionality of any system.

11.4. The Critical Few

11.4.1. The Critical Few, also known as Pareto’s Law or the “80/20” rule, which explains that in many areas of life 20% of the input produces 80% of the output, and vice versa. You can achieve great results by focusing on the critical inputs that produce most of the outputs that you want. The same can be applied for the results that you don’t want. Sometimes eliminating certain sources of input is the smart choice, because they are significant Opportunity Costs. Find the inputs that produce the desired outputs and focus on them. Weed out the rest.

11.5. Diminishing Returns

11.5.1. Something suffers Diminishing Returns when, after a certain point, having more of it becomes pointless or detrimental. Optimizing everything to perfection is almost impossible. After picking the “low hanging fruit”, further optimization can cost more than the returns you’ll reap. Optimize until reaching the point of Diminishing Returns, then focus on something else.

11.6. Friction

11.6.1. Friction is any process that removes energy from a system over time. It’s necessary to continue to add energy to a system when there’s Friction to keep it moving at the same rate. Introducing Friction can sometimes make people behave in a certain way, like having to present a receipt when making a return, which can lower your return rate. But doing this too much can lower your Reputation. Remove Friction from your business to increase quality and efficiency.

11.7. Automation

11.7.1. Automation refers to a system or process that can operate without human intervention. Automation is best for repetitive, well-defined tasks. The less human intervention, the more efficient the Automation. Automation is the best way to Scale, Duplication and Multiplication.

11.8. The Paradox of Automation

11.8.1. The Paradox of Automation says that the more efficient the automated system, the more crucial the human contribution of the operators. Humans are less involved, but their involvement becomes more critical. If an automated system has an error, it will multiply that error until it’s fixed or shut down. This is where human operators come in. Efficient Automation makes humans more important, not less.

11.9. The Irony of Automation

11.9.1. The Irony of Automation is that the more reliable the system, the less human operators have to do, so the less Attention they pay to the system while it’s operating. Reliable systems tend to make it hard for operators to notice when something’s wrong. If an error is not noticed, it can eventually become the “new normal.” The best way to avoid Automation errors is rigorous Sampling and Testing. Focus on keeping your operators engaged, and they will be better suited to notice when something’s wrong.

11.10. Standard Operating Procedure

11.10.1. A Standard Operating Procedure (SOP) is a predefined process used to complete a task or resolve an issue. SOPs reduce Friction and minimize Willpower: less time and energy spent solving a problem that has already been solved before. SOPs are very effective ways to bring new members of a team up to speed quickly. Review your SOPs regularly because they may become outdated. SOPs should make day-to-day management easier, not increase Friction or bureaucracy.

11.11. Checklist

11.11.1. Checklists are Externalized, predefined Standard Operating Procedures for completing a specific task. Checklisting can help you define a system for a process that hasn’t been formalized yet. Checklists are helpful to ensure you don’t forget important stuff when you get busy. Checklisting can help not only by improving the quality of your work, but also by making it easier to delegate more effectively. Creating a Checklist for the Five Parts of your Business can have great overall results.

11.12. Cessation

11.12.1. Cessation refers to the conscious choice to stop doing something that’s counterproductive. Since we suffer from Absence Blindness, we tend to believe that we have to always do something to improve a system. Doing nothing may be the best path in many cases.

11.13. Resilience

11.13.1. Resilience is having the toughness and flexibility to handle whatever is thrown at you. Resilience is a very underrated quality in business and other important areas of life. Resilience doesn’t come with optimal Throughput. Flexibility comes at a price. Preparing for the unexpected makes you more Resilient. Being able to adjust strategies and tactics may be the difference between survival and the end. Planning for both Resilience and performance is the mark of a good management.

11.14. Fail-safe

11.14.1. A Fail-Safe is a backup system designed to prevent or allow recovery from a primary system failure. Fail-safes are not efficient if you think you’ll never need them. The thing is, if you ever need one, it’ll be too late to develop it. Fail-safes must be developed before they are needed. Separate your Fail-safe from your primary system as much as possible to prevent one tragedy ruining everything. Never make the backup system part of the system you’re trying to protect. Interdependence is not good when it comes to Fail-safes. Try to eliminate single points of failure. If the system relies on critical inputs to function, you should plan for when those inputs aren’t available.

11.15. Stress Testing

11.15.1. Stress Testing means identifying the boundaries of a system by simulating certain environmental conditions. To try Stress Testing, you should ask this question about your system: What would it take to break it? Stress Testing is a great way to understand how your system works. Be creative and let chaos take over, then fix any problems you may find before you take your system to the real world.

11.16. Scenario Planning

11.16.1. Scenario Planning means constructing hypothetical situations, then Mentally Simulating what you would do if they occur. By coming up with as many courses of action for that potential circumstance, you’ll develop several responses to any imaginable situation. Scenario Planning is the key to effective strategy. Instead of focusing on one option, your business becomes more flexible and Resilient. Skipping Scenario Planning might be tempting, but try not to. Planning for the future on a regular basis is extremely valuable for any business. Don’t waste time with unknowable futures. Focus on the most likely scenarios and you’ll be well prepared if they actually occur.

11.17. Sustainable Growth Cycle

11.17.1. It’s a mistake to assume any system can grow indefinitely, without limit. Systems tend to have a natural size, and exceeding this size can cause many problems. Systems that grow typically have a Sustainable Growth Cycle that ensures the system doesn’t get out of control. Elements of a system that are out of control need to be eliminated. Businesses move through three phases: In an Expansion cycle: the company is focused on growing. In a Maintenance cycle, the company is focused on executing the current plan. In a Consolidation cycle, the company is focused on analysis and pruning waste and inefficiency.

11.18. The Middle Path

11.18.1. The Middle Path is the balance between too little and too much: just enough. No one can tell you what the Middle Path is, you have to find out for yourself. It’s a constant learning process. Uncertainty is part of the game, you can’t eliminate it. There’s no point in being too afraid of it because it’s not going away. Embracing the Uncertainty is what differentiates the good from the great.

11.19. The Experimental Mindset

11.19.1. The Experimental Mindset is the healthy approach to business. There’s no way to tell what will work and what won’t. You need to constantly experiment. Every experiment will teach you something new and prepare you better for the next challenge. Experimentation is learning through play. It’s the center of living a productive and fulfilling life.